As the rally of Bitcoin (BTC) and Ethereum (ETH) continues to gain momentum, the surge in open interest for both assets is reminiscent of the feverish days of the 2021 rally. This surge in trading activity is a clear sign that the bull market is in full swing. However, the similarities to 2021 are also a cause for concern, indicating that the market may be overheating and that further volatility in BTC and ETH prices could be on the horizon.
While we are not yet near the all-time highs that we will likely see later in the cycle, cautious investors should exercise some restraint at these elevated prices. Bitcoin has risen by over 50% in the past 30 days and is nearing its all-time high, while Ethereum has seen a staggering 50% increase during the same period.
But it’s not just the rapid price appreciation that suggests imminent volatility for these two major cryptocurrencies. Technical indicators such as open interest and Bitcoin funding rates, when considered collectively, paint a picture of a market that may be getting frothy.
Last week, the funding rates in Bitcoin perpetual futures listed on Binance exceeded 100% for the first time in at least a year, indicating that leverage is heavily skewed towards the bullish side. Additionally, the rising open interest reflects a spike in the volume of open BTC and ETH derivatives positions on exchanges, including both long and short positions in futures or options contracts. High funding rates, extreme price movements, and rising open interest often serve as warning signs for traders, especially those using leverage.
On March 4, open interest in Bitcoin reached $31 billion, easily surpassing the previous record of $24.3 billion set on April 14, 2021. At that time, Bitcoin’s price was around current levels, opening at $63,524 before dropping by 23% to $49,078 by April 26, 2021.
Meanwhile, open interest in ETH futures stood at around $12 billion on March 4, approaching the peak of $13 billion seen on November 9, 2021, the day ETH reached an all-time high of $4,810. By November 19, ETH had fallen to $3,996, a 17% decline from its peak.
Drawing parallels with 2021, it appears that BTC and ETH may need a breather. Bitcoin has surged by over 180% in the year leading up to March 4, surpassing its previous record in some major currencies such as the Argentine peso and the Japanese yen. ETH has lagged behind, rising by over 120% in the past 12 months.
There are several reasons why Ether has not kept pace with Bitcoin in terms of price movements, including the fact that the deadline for the approval of a spot ETH ETF is still a few months away. We can expect further price appreciation leading up to this crucial decision. Similarly, the upcoming Bitcoin halving next month will likely act as a catalyst for further price increases, based on historical patterns.
Therefore, the rising open interest and funding rates do not alter the fundamentals surrounding BTC and ETH, as fresh all-time highs are still highly likely in this cycle. They simply indicate that the crypto market may be getting ahead of itself. This frantic trading is not solely driven by professional traders or long-term crypto believers; it also signals an increase in FOMO (fear of missing out), which can easily lead to a market collapse in the short term.
In such frothy markets, it is crucial to have a solid strategy and stick to it, without allowing emotions to cloud judgment. For options traders, this means closely monitoring the charts and data, rather than solely focusing on price increases. For buy-and-hold investors, it is important to remember that crypto is a volatile asset class, and further volatility is likely on the horizon.
Above all, it serves as a reminder for anyone involved in crypto to remain calm and avoid getting carried away by the excitement of assets soaring towards their all-time highs. There will be plenty more opportunities for excitement in the coming months. It is those who maintain their composure amidst market turbulence who are likely to achieve the most success in this bull run.
Lucas Kiely is the Chief Investment Officer for Yield App, where he oversees investment portfolio allocations and leads the expansion of a diversified investment product range. He previously served as the Chief Investment Officer at Diginex Asset Management and as a Senior Trader and Managing Director at Credit Suisse in Hong Kong, where he managed QIS (Quantitative Investment Strategies) and structured derivatives trading. He also held the position of Head of Exotic Derivatives at UBS in Australia.
This article is for general information purposes only and should not be construed as legal or investment advice. The views, thoughts, and opinions expressed in this article are solely those of the author and do not necessarily reflect or represent the views and opinions of Cointelegraph.