As Litecoin’s halving approaches in less than two weeks, traders are expressing concerns about whether the anticipated scarcity effect will be sufficient to maintain LTC’s price above the $90 mark.
Currently, Litecoin’s price stands at $93.38, representing a 19% decline over the past 18 days.
However, the cryptocurrency has shown a positive performance of 31% throughout the year, with significant gains observed between June 29 and July 2, resulting in a 34% rally and pushing the price to a 14-month high of $115.
A worrying statistic is emerging from the derivatives market, indicating that a sharp correction may be on the horizon.
Historical data reveals that in each of the three instances where Litecoin futures open interest dropped below $500 million, substantial price drops of 38% or higher occurred. This pattern appears to align with the current scenario.
During the recent surge in Litecoin futures’ aggregate open interest, from $300 million on June 29 to $615 million on July 2, there was a notable increase in demand for leveraged futures contracts.
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Although the price reached a 14-month high on July 2, it subsequently declined 20% to $92. Despite the open interest remaining above the $500 million mark, which suggests buyers added margin to avoid liquidation, the risk of a sharp correction remains.
High active contracts (open interest) are generally positive as they allow for larger price swings due to leverage, but they also pose a risk of potential liquidations when traders’ positions are closed due to insufficient margin.
Looking back at the November 2021 crash and open interest, it becomes evident that Litecoin’s open interest dropping below the $500 million threshold has been a reliable indicator of investors’ waning interest, leading to drastic corrections in each instance.
On November 10, 2021, Litecoin’s open interest surpassed $500 million, coinciding with a six-month price high of $289.
Following the subsequent drop below $500 million on November 14, 2021, Litecoin’s price experienced a 48% crash in the following 24 days.
Similar patterns were observed in February and May 2021, where Litecoin’s open interest breached the $500 million threshold, resulting in significant price drawdowns shortly afterward.
These events suggest that if Litecoin’s open interest declines from its current $500 million level, there may be a potential 30% drawdown from $94 to $62.
While it is essential to consider historical trends, it is crucial for traders and investors to keep a close eye on Litecoin’s open interest to assess potential risks and make informed decisions in the volatile cryptocurrency market.
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