There was a time when BitMEX derivatives exchange reigned sovereign over other exchanges, and the company effectively held a 50% market share until July 2019. For this reason, traders kept a close eye on every indicator connected to BitMEX, including its funding rate, open interest, and basis.
Open interest measures the total number of contracts held by market participants. As the figure rises higher, so does the potential size of liquidations. On Aug. 2, a $1,400 crash happened as $1 billion in futures contracts were forcefully closed due to insufficient margins.
Although there is no magic number, traders tend to get shaky as open interest nears $1 billion, causing a phenomenon some traders refer to as the BitMEX ghost. This became evident during the second half of 2019, when massive Bitcoin price crashes occurred on seven different instances when open interest tops $1 billion.
The perceived risk associated with high open interest depends on how liquid the underlying asset is. During the third quarter of 2019, Bitcoin’s regular volume on spot exchanges averaged $2.4 billion per day. Thus, a single contract totaling 42% of the Bitcoin volume seemed sizeable enough.
As the chart above depicts, there is little doubt that open interest near $1 billion coincided with relevant price crashes from July through September. It is worth noting that a notable number of contracts in play cannot be deemed bullish or bearish.
The second half of 2019 was mostly bearish
The latter half of 2019 was quite rough for cryptocurrencies, and as most investors will recall, even President Trump publicly bashed Bitcoin, as reported by Cointelegraph. All this happened while the United States Treasury Secretary Steven Mnuchin demanded additional regulation and oversight for the sector.
The chart above shows much better detail of how relevant BitMEX’s…