Price has been hovering around the monthly low for two days. When I check the market these days, the first thing I look at isn't the candlestick chart, but two numbers: funding rate and open interest.
A beginner can learn how to read these two things in just one minute.
Funding rates are payments exchanged between longs and shorts in perpetual contracts. A positive rate means there are more longs, so longs pay shorts; a negative rate means the opposite. The more extreme the rate, the more crowded one side is—and the easier it is to get swept in the other direction.
Open interest is the total amount of contract positions that haven't been closed. It only becomes meaningful when viewed alongside price:
1. Price falls and open interest also declines: longs are admitting defeat and exiting, so the decline often eases later on.
2. Price falls, open interest stays flat or even rises: someone is holding onto losing positions or buying the dip with leverage. If support breaks again, cascading liquidations can follow.
3. Price rises, open interest falls: this is usually shorts being forced to close. The rally may be sharp, but it may not last.
Let’s use today’s $BTC as an example. Binance BTC perpetual open interest rose from about 98,700 BTC to around 100,500 BTC over the day—it increased rather than decreased. The latest funding rate was about 0.0068%, slightly positive, so longs are still paying. As for the price, CoinGecko shows it at around 74,000, not far from the CPI-night low of 72,744. $ETH was similar, at around 2,059, down 1.6% on the day.
My take is: after a week of declines, the longs in the derivatives market haven’t really exited. In fact, some people are buying the dip. That’s not necessarily a bad thing, but it means that if 72,700 gives way, those newly added leveraged positions could be the ones getting liquidated.
So here’s what I’ve been doing these past couple of days:
- When open interest rises but the price doesn’t, I don’t open new leveraged long positions;
- I keep the leverage on existing positions below 3x, and avoid placing stop-losses at round numbers;
- I’ll be more interested when I see the price fall, open interest drop noticeably, and the funding rate turn negative.
These two metrics can’t tell you whether the price will rise or fall tomorrow, but they can show you which side of the market is more crowded right now.
Before opening a derivatives position, do you check the funding rate and open interest, or just look at the candlestick chart?
The above is solely my personal opinion and does not constitute investment advice. Markets involve risk.