Level 2
8 min readLesson 9 of 43

Open Interest: Reading the Derivatives Market

How to see where the big money is positioned

Open interest tells you where the big money is positioned. Here's how to read it.

Open Interest: Reading the Derivatives Market

Open interest is the single most underrated metric in crypto trading.

While retail traders obsess over RSI and MACD, professionals watch open interest like hawks. It tells you something that no price-based indicator can: how much money is actually in the game, and whether that money is coming or going.

Once you understand open interest, you'll see the market completely differently. Moves that seemed random will start making sense. "Manipulation" will reveal itself as predictable mechanics.

Let's break it down.

What Is Open Interest?

Open interest (OI) is the total number of outstanding derivative contracts that haven't been settled.

In simpler terms: it's the total size of all open positions in the futures or perpetual swap market.

When a trader opens a new long position and another trader opens a new short position, open interest increases by one contract. When a long closes their position by selling to a short who's also closing, open interest decreases by one contract.

Key insight: OI measures participation, not direction. High OI means lots of money is positioned in the market. Low OI means traders are on the sidelines.

This is fundamentally different from volume. Volume measures activity—how many contracts changed hands. Open interest measures commitment—how many contracts are still in play.

OI vs Volume: The Critical Difference

This distinction trips up most traders, so let's be crystal clear.

Volume tells you: "There was a lot of trading activity today."

Open interest tells you: "There's a lot of money committed to positions right now."

High volume with flat OI means existing positions are changing hands. People are trading, but the overall market positioning isn't changing.

High volume with rising OI means new money is entering the market. New positions are being opened.

High volume with falling OI means money is leaving the market. Positions are being closed.

This context changes everything about how you interpret a move.

The Four OI Scenarios

Here's the framework that will change how you read charts:

Scenario 1: Price Up + OI Up

  • •New long positions are being opened
  • •Bulls are confident and adding
  • •The move is being fueled by fresh money
  • •Interpretation: Strong bullish—new money supporting the move

Scenario 2: Price Up + OI Down

  • •Shorts are closing (buying to cover)
  • •The move is fueled by short covering, not new longs
  • •Less sustainable than Scenario 1
  • •Interpretation: Weak bullish—short squeeze, may exhaust quickly

Scenario 3: Price Down + OI Up

  • •New short positions are being opened
  • •Bears are confident and adding
  • •The move is being fueled by fresh money
  • •Interpretation: Strong bearish—new money supporting the move

Scenario 4: Price Down + OI Down

  • •Longs are closing (selling to exit)
  • •The move is fueled by long capitulation, not new shorts
  • •Less sustainable than Scenario 3
  • •Interpretation: Weak bearish—liquidation flush, may find bottom soon

This framework alone puts you ahead of 90% of retail traders. They see price going up and think "bullish." You see price going up with falling OI and think "short squeeze that might exhaust."

Reading OI in Real-Time

Let me show you how this works in practice.

Example 1: The Sustainable Rally

Bitcoin is at $90,000. Over the next week, it climbs to $95,000. You check OI and see it's risen from $15 billion to $18 billion.

This tells you: new money entered long during the move. These aren't just shorts covering—fresh capital is betting on higher prices. The move has support.

Example 2: The Short Squeeze

Bitcoin is at $90,000. Over 4 hours, it pumps to $94,000. You check OI and see it's dropped from $15 billion to $13.5 billion.

This tells you: the move was driven by shorts closing, not new longs entering. $1.5 billion in positions just got squeezed out. Once the shorts are flushed, who's left to buy? Be cautious about chasing.

Example 3: The Liquidation Flush

Bitcoin drops from $95,000 to $91,000 in an hour. OI drops from $18 billion to $15 billion.

This tells you: $3 billion in longs just got liquidated or panic-closed. The selling isn't new shorts attacking—it's trapped longs exiting. Once they're flushed, selling pressure may dry up. Watch for reversal.

Example 4: The Sustained Breakdown

Bitcoin drops from $95,000 to $91,000 over two days. OI rises from $15 billion to $17 billion.

This tells you: new shorts are entering, actively betting on lower prices. This isn't just long liquidation—fresh money is coming in short. The move has legs. Don't try to catch the falling knife.

OI Extremes and Mean Reversion

Beyond the four scenarios, absolute OI levels matter.

When OI reaches extreme highs relative to recent history, the market is overleveraged. Lots of positions means lots of liquidation fuel. Volatility tends to increase. Moves in either direction become more violent.

When OI reaches extreme lows, the market is underleveraged. Fewer positions means less liquidation fuel. Moves tend to be more muted. This is often the calm before a storm—eventually, something will draw traders back in.

Practical application: When OI is at multi-month highs and price has been trending, a reversal is more likely to cascade. When OI is at multi-month lows after a ranging market, a breakout is likely coming.

OI by Exchange

Not all OI is equal. Where the positions are held matters.

Different exchanges have different user bases:

  • •Binance: Mix of retail and sophisticated traders, highest liquidity
  • •Bybit: Popular with retail, more aggressive leverage
  • •OKX: Strong Asian user base, significant whale activity
  • •BitMEX: Historically whale-heavy, less retail
  • •CME: Institutional only, regulated futures

When OI rises primarily on retail-heavy exchanges with high leverage, expect more violent liquidations. When OI rises on CME, that's institutional money with lower leverage—more sticky, less likely to cascade.

Pro tip: Watch for OI divergences between exchanges. If Binance OI is rising but CME OI is flat, retail is driving the move. If CME OI is rising while retail exchange OI is flat, institutions are positioning.

Combining OI with Other Data

OI becomes even more powerful when combined with the other metrics we'll cover in this level.

OI + Funding Rates:

  • •High OI + extreme positive funding = overleveraged longs, short squeeze risk but also long liquidation setup
  • •High OI + extreme negative funding = overleveraged shorts, potential rocket fuel if price moves up

OI + Liquidation Levels:

  • •Rising OI near major liquidation clusters = fuel accumulating for a move
  • •When price finally breaks the cluster, expect acceleration

OI + CVD (Cumulative Volume Delta):

  • •Rising OI + positive CVD = aggressive buying into new longs
  • •Rising OI + negative CVD = aggressive selling into new shorts

We'll cover each of these combinations in upcoming lessons. For now, just understand that OI is one piece of a larger puzzle—but it's a crucial piece.

Where to Track Open Interest

Several platforms provide OI data:

Free options:

  • •Coinglass (coinglass.com) - Basic OI charts and aggregated data
  • •TradingView - Some OI indicators available

Paid options with more depth:

  • •HyBlock Capital - Detailed OI by exchange, historical data, API access
  • •Laevitas - Options and perp OI analytics
  • •Velo Data - Real-time OI changes

For most traders, starting with Coinglass free tier is enough to begin incorporating OI into your analysis. As you get more sophisticated, the paid options provide more granular data and historical analysis.

Common OI Mistakes

Mistake 1: Treating OI as directional OI tells you participation, not direction. Rising OI means new positions—it doesn't tell you if they're winning or losing positions.

Mistake 2: Ignoring the timeframe OI rising over a week has different implications than OI rising over an hour. Quick OI spikes often mean retail FOMO. Gradual OI builds often mean more sophisticated accumulation.

Mistake 3: Looking at OI in isolation OI without price context is meaningless. Always analyze OI relative to price movement.

Mistake 4: Forgetting that OI is aggregate When OI rises, both a long AND a short are being opened. The question is: which side is "smart money" and which side is about to get liquidated?

Key Takeaways

  1. •

    OI measures commitment, not activity. It tells you how much money is positioned, not how much traded.

  2. •

    The four scenarios are your framework. Price direction + OI direction = market context.

  3. •

    OI extremes signal volatility. High OI = liquidation fuel. Low OI = calm before the storm.

  4. •

    Exchange composition matters. Retail-heavy vs institutional OI behaves differently.

  5. •

    Combine OI with other metrics. OI + funding + liquidation levels = powerful edge.

What's Next

You now understand how to read market participation through open interest. But there's another crucial piece of derivatives data: funding rates.

Funding rates tell you who's paying whom to hold their position—and when those payments become extreme, mean reversion opportunities appear.

In Lesson 2.4, we'll break down funding rates and show you how to spot when the market is about to snap back.

Continue to Lesson 2.4: Funding Rates - The Cost of Being Wrong.

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