A multi-year review of Litecoin futures open interest reveals unique trends that have had a significant impact on Litecoin’s price in the past.
With less than two weeks to go until Litecoin’s halving, when miners’ block subsidies are cut in half, traders are questioning whether the additional scarcity effect will be enough to sustain Litecoin prices above $90.
Litecoin ( LTC ) has lost 19% in price over the past 18 days, but is up 31% this year. Notably, most of the gains occurred between June 29 and July 2, with a 34% increase pushing the price to a 14-month high of $115.
However, a shocking statistic from the derivatives market suggests that a dramatic correction may be underway.
Historical data is not favorable for Litecoin bulls
The previous three instances in which Litecoin futures open interest fell below $500 million each resulted in a price drop of 38% or more, which may be in line with the current situation.
Litecoin futures saw a significant surge in total open interest in U.S. dollars from June 29 ($300 million) to July 2 ($615 million), indicating increased demand for leveraged futures contracts.
Litecoin’s price reached a 14-month high on July 2, but has since fallen 20% to $92. However, what is concerning is that Litecoin’s open interest remains above the $500 million mark. This suggests buyers have increased margins to avoid liquidation, but the risk of a sharp correction remains.
Higher active contracts (open interest) are typically positive, enabling investors who require a specific market size to participate. Even though it's not necessarily bullish on price momentum, it allows for greater price movement due to leverage and potential liquidations when traders close out their positions due to lack of margin.
Looking Back at the November 2021 Crash and Open Interest
Litecoin’s open interest falling below the $500 million threshold seems to be a reliable indicator of waning investor interest, and three recent events have confirmed this thesis, as its price has faced sharp corrections each time.
On November 10, 2021, Litecoin’s open interest exceeded $500 million while hitting a new six-month high of $289. Interestingly, after open interest fell below $500 million on November 14, 2021, the price of Litecoin plummeted 48% in 24 days.
Litecoin’s open interest had previously surged but failed to cross the $500 million mark, even when the price surged 40% to $232 in early September.
Two additional events between February and June 2021 further confirmed the correlation of open interest, marking a sharp retracement after futures open interest crossed the $500 million threshold.
Similar incidents occurred in February 2021 and May 2021
Litecoin’s open interest surged to over $500 million on February 8, 2021, with the price rising 64% and peaking at $247 on February 20, 2021. However, that same day, open interest fell below $500 million, causing the price to drop 38% over the next eight days. Notably, the psychological price support of $200 held for five days before Litecoin price dropped to $142.
On May 9, 2021, Litecoin’s open interest fell below $500 million again after 49 days. During that time, it reached an all-time high of $409 before retracing 71% in just 13 days to end at $118.
While causation cannot be drawn from events 19 months ago, it is crucial to keep a close eye on Litecoin’s open interest. If it were to drop from the current level of $500 million, history suggests it could fall from $94 to $62, a 30% drop.