Data shows that the Bitcoin Open Interest to Market Cap Ratio rose to a new all-time high (ATH) along with the latest price increase.
Bitcoin’s open interest to market cap ratio is now at a two-year high
As explained by cryptocurrency news account Satoshi Club in an X afterBTC Open Interest has been overheating relative to market cap lately. The benchmark that is important here is the ‘Open Interest to Market Cap Ratio’ of the market information platform IntoTheBlock.
As the name suggests, this indicator tells us about how the Open interest of Bitcoin compares to its Market capitalization. The Open Interest refers to a measure of the total number of derivative positions related to BTC that are currently open across all exchanges.
Derivatives contracts are financial instruments that allow investors to bet on the price movements of BTC without necessarily owning real tokens. For this reason, the Open Interest is also called a measure of the ‘paper’ BTC present in the sector.
The market capitalization is the total value of the circulating supply of the cryptocurrency at the current exchange rate. So the Open Interest to Market Cap Ratio basically tells us how the volume of paper BTC compares to the cash value of the asset.
Here is a chart showing the trend in this indicator for Bitcoin over the past few years:
The value of the metric appears to have been heading up in recent days | Source: @esatoshiclub on X
As shown in the chart above, the Bitcoin Open Interest to Market Cap Ratio has seen a sharp increase alongside the latest price rally that has taken the asset to a new all-time high (ATH).
This is an interesting trend, as market capitalization going up should mean the ratio would go down instead, since it’s in the denominator. The fact that it has risen anyway implies that paper BTC has simply been printed faster than the market cap has. got up.
The indicator has now reached the 6% mark, meaning there are now enough derivatives positions open to make up 6% of the cryptocurrency’s total capitalization. This latest high in the metric is the highest since November 2022, when the collapse of the FTX stock exchange happened.
Historically, the high Open Interest to Market Cap Ratio has not been a positive sign for BTC as it implies that there is excess leverage in the sector.
The aforementioned November 2022 high had led to a crash for the asset that would take it to the bear market low. A similar cooling had also occurred earlier this year.
It now remains to be seen whether the market cap could grow despite the overheated conditions on the derivatives side, or whether another massive leverage squeeze for Bitcoin would follow.
BTC price
Bitcoin is on the verge of a new all-time high as its price is currently hovering around $76,300.
Looks like the price of the coin has been in ATH discovery mode recently | Source: BTCUSDT on TradingView
Featured image from Dall-E, IntoTheBlock.com, chart from TradingView.com