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, it also raises concerns that the market is overheating, which could lead to increased volatility in BTC and ETH prices in the near future.
While we are not yet at the all-time highs that we will see later in the cycle, investors should exercise caution at these high prices. Bitcoin has risen more than 50% in the past 30 days and is approaching its all-time high, while Ethereum has seen a 50% increase during the same period.
But it’s not just the rapid price appreciation that suggests imminent volatility in the two largest crypto assets. Technical indicators such as open interest and Bitcoin funding rates paint a picture of a frothy market.
Last week, the funding rates in Bitcoin perpetual futures listed on Binance exceeded 100% for the first time in at least a year, indicating a skew towards bullish leverage. Additionally, rising open interest reflects an increase 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, 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 falling by 23% to $49,078 by April 26, 2021.
Meanwhile, open interest in ETH futures reached around $12 billion on March 4, approaching the peak of $13 billion seen on November 9, 2021, when ETH reached an all-time high of $4,810. By November 19, ETH had fallen to $3,996, 17% below its peak.
Drawing parallels with 2021, it is clear that BTC and ETH need a break. Bitcoin has risen more than 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, on the other hand, has risen more than 120% in the same period.
There are several reasons why Ether lags behind Bitcoin in terms of price movements, including the fact that the deadline for a spot ETH ETF approval is still a few months away. We can expect further price appreciation leading up to this historic decision. Similarly, the Bitcoin halving scheduled for next month is likely to be a catalyst for further price increases, based on historical patterns.
So, the rising open interest and funding rates do not change the fundamentals of BTC and ETH — fresh all-time highs are still almost guaranteed this cycle. They simply indicate that the crypto market is becoming overexcited. This frantic trading is not limited to professional traders or long-term believers in crypto; it also reflects a rise in FOMO (fear of missing out), which can easily lead to a market downturn 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 paying attention to the charts and data, not just the green candles. For buy-and-hold investors, it means remembering that crypto is a volatile asset class and that further volatility is likely.
But most importantly, it serves as a reminder for anyone involved in crypto to stay calm and not get carried away with the excitement of assets approaching their all-time highs. There will be plenty more opportunities for excitement in the coming months. It is those who remain level-headed amidst market turbulence who will be the most successful in this bull run.