The cryptocurrency market recently experienced a sudden decline in Ethereum's price, followed by a drop in the open interest metric to a multi-month low. However, an upswing in buying pressure led to a significant price surge. These abrupt market movements are often linked to liquidations in the futures market, and it's crucial to investigate whether this is the case once again.
The Open Interest metric, representing the total number of open positions in perpetual futures markets, shows higher values typically signal increased market volatility. The recent spike in price coincided with a sharp uptick in Open Interest, suggesting that the futures market might have driven the recent bullish rally. The significant surge in Open Interest implies a short liquidation cascade occurred, propelling the market upwards.
Despite the consistent upward trend in the Open Interest metric, traders need to exercise caution. While rising values could indicate potential upward market movements, it's essential to monitor this indicator closely, as elevated readings might be accompanied by substantial liquidations, potentially leading to unexpected downturns in the market.