Data shows Polkadot’s price often plummets after reaching $ 1 billion open interest: will history repeat itself?

By November 4, 2021Polkadot
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Whenever there is a relevant growth in the number of derivatives contracts in play (open interest), it usually means that there are more active traders in the market.

In futures markets, longs (buyers) and shorts (sellers) are balanced at all times, but having a greater number of active contracts allows the participation of institutional investors who require a minimum market size.

However, in the case of Polkadot (DOT), price drops have often been anticipated when open interest breaks the billion dollar mark.

Polkadot price in USD (Bitfinex). Source: TradingView

The April 17 crash came after the DOT token hit its all-time high of $ 48.30, prompting open futures interest of $ 1.2 billion. Over the following week, the altcoin fell 45% to $ 26.60, bringing the number of active contracts to the equivalent of $ 600 million.

Three weeks later, on May 15, a similar move occurred when Polkadot set a new all-time high of $ 49.80. This time it was followed by a 68% crash five days later. Consequently, open interest in futures contracts reached a 4-month low, at USD 220 million.

Added open interest in Polkadot futures. Source: Coinglass.com

Notice how Polkadot’s 28% rise in the first two days of November led to an all-time high of $ 53.30 and also pushed the derivatives gauge past the $ 1 billion mark.

The DOT 18.9 million development fund, announced on October 17, accentuates the rally that has already occurred ahead of the parachain auctions scheduled for mid-November. According to Polkadot founder Gavin Wood, the $ 960 million grant will be used to build, enhance and educate the growing ecosystem of the network.

The projects are currently raising capital to fund their parachain auctions and investors in Polkadot who wish to support any of them must lock their DOTs in a sponsored account. In return, investors are rewarded with tokens from the project competing for the parachain space.

And what about the billion dollars?

The current billion dollar “death mark” in the open interest of Polkadot futures, does it mean a possible crash or will it be different this time?

As explained above, The open interest metric cannot be considered bullish or bearish on its own. Therefore, to find out if derivatives traders are using excessive leverage, you have to analyze the data from perpetual futures contracts.

This is the preferred derivative instrument of retail traders because its price tends to follow the regular spot markets.

To balance their risk, exchanges will charge a funding fee to the party that demands the most leverage and this fee will be paid to the opposing party.

8-hour funding rate of Polkadot perpetual futures in May. Source: Coinglass.com

Neutral markets usually show a positive financing rate of 0% to 0.03%, which is equivalent to 0.6% per week, which indicates that longs pay it. The average rate before the May 15 crash was slightly higher, at 0.075%, which is roughly 1.6% weekly. At the time, longs were not desperate to close their positions and there was no sign of excessive leverage.

The only possible conclusion is that a widespread market crash caused investors and traders to desperately sell their altcoins, and thus derivatives markets were not the main cause of the crash.

Another comforting tidbit for Polkadot holders is DOT’s current 8-hour funding rate, which is 0.05%. This is mildly optimistic and not approaching levels that are considered worrisome. At the moment, there are no signs of a possible collapse due to the $ 1 billion in open interest.

The views and opinions expressed here are solely those of the Author and do not necessarily reflect the views of Cointelegraph.com. Each investment and commercial movement involves risks, you must do your own research when making a decision.

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