Bitcoin Indicators For Your Toolbox

Where next for the price of bitcoin?

There is no shortage of views and predictions on what the price of bitcoin will do next.

However, rather than relying on the “gurus,” investors should form their own opinions, and the best starting point is to look at the data.

A good indicator will give the best sense of the direction of the bitcoin price and, as importantly, sentiment.

Bitcoin futures and options contracts

One metric to watch is open interest in the derivatives market—specifically, the total outstanding notional open interest on futures and options contracts.

Open interest is the total amount of outstanding derivatives contracts in the market that have not been settled.

When an investor opens a futures position in bitcoin with a margin, for example, of $2,000 and a leverage of 10x, the total position size is $20,000. That is the amount added to the open interest in the market.

In the options market, it’s the total size of the option notional, whether calls or puts.

Note: Open interest is a combination of both long and short positions. They don’t cancel each other out.

So, how can an investor use open interest to gauge market positioning?

If open interest is increasing, more people are opening new futures contracts, both long and short.

The ratio of long vs. short

However, that in itself is not particularly useful. Knowing the ratio of long vs. short, how the open interest is changing, and what the price in the market is doing adds clarity.

The ratio of longs v shorts is presented in the Coinglass long/short ratio.

All things equal, the higher the ratio, the more investors there are in the market who are taking bullish bets.

That analysis should be combined with the direction in which the open interest is going and in conjunction with what the price is doing.

For example, if open interest increases and the price increases, that’s generally a strong bullish signal, indicating a high probability of a price increase. If open interest increases and the price falls, that is a strong bearish signal, indicating a high likelihood of a price decrease.

If open interest declines and the price increases, that is a weak bearish signal. However, if open interest declines and the price falls, that is potentially a weak bullish signal.

Several websites show the data, including www.theblock.co and www.coinglass.com.

Open interest is just one indicator that investors should consider for their toolbox. Keep an eye out for future posts that will highlight additional indicators.