Polkadot tends to collapse after its open interest exceeds one billion dollars: will it happen again?

By November 5, 2021Polkadot
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Whenever there is a significant growth in the number of open derivative contracts (open interest), this usually involves the involvement of more traders.

In the futures markets, longs and shorts are always in equilibrium, but having a larger number of active contracts allows the participation of institutional investors who require a minimum market size.

However, in the case of Polkadot (DOT), price collapses were often anticipated by this indicator breaking the $ 1 billion threshold.

DOT / USD chart on Bitfinex. Source: TradingView

The collapse on April 17 came after DOT hit its all-time high of $ 48.30, which led to an open interest on futures of $ 1.2 billion. Over the next week, the altcoin fell 45% to $ 26.60, bringing the value of active contracts to an equivalent of $ 600 million.

Three weeks later, on May 15, a similar move occurred as Polkadot recovered its all-time high of $ 49.80. This time, a 68% slump followed over the next five days. As a result, futures open interest hit a 4-month low of $ 220 million.

Open Interest on Polkadot aggregate futures. Source: Coinglass.com

It is important to note that DOT’s 28% rally in the first two days of November brought an ATH of $ 53.30, and the derivatives indicator above the $ 1 billion level.

The 18.9 million token development fund announced on October 17 has accelerated the rally already underway, ahead of the parachain auctions scheduled for mid-November. According to Polkadot founder Gavin Wood, the $ 960 million grant will be used to develop, improve and educate the growing network ecosystem.

The projects are currently raising capital to launch their parachain auctions: Polkadot investors wishing to back them have to block their DOTs in an unavailable account. In return, investors are rewarded with tokens awarded by the project competing for the parachain slot.

And the question of the 54 billion dollars?

Does the current $ 1 billion “cap” on Polkadot futures open interest signal a potential slump, or will it be different this time?

As explained above, the open interest parameter cannot be considered to be bullish or bearish in itself. Hence, to understand whether derivatives traders are using excessive leverage, perpetual futures contract data should be analyzed.

This instrument is the preferred derivative of retail traders, as its price tends to follow normal spot markets.

To balance their risk, exchanges charge a funding rate to the party that requires the most leverage, paid off by the other party.

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

Neutral markets tend to show a positive funding rate of 0% to 0.03%, equivalent to 0.6% per week, indicating that longs are paying for it. The average rate before the May 15 crash was a bit higher, at 0.075%, about 1.6% per week. At that time, longs were not rushing to close their positions and there were no signs of excessive leverage.

Related: Polkadot Aims for $ 100? DOT’s 25% rise triggers a bullish pattern

The only possible conclusion is that a generalized market crash has led investors and algorithmic traders to desperately sell their altcoins, excluding derivatives from the possible root causes of the crash.

Another comforting fact for Polkadot holders is DOT’s current 8-hour loan rate of 0.05%, generally considered an optimistic level. At present, there are no signs of a potential collapse caused by open interest futures currently above $ 1 billion.

The views expressed herein are solely ofauthor and do not necessarily reflect those of Cointelegraph. Every investment involves risk. You should conduct your research before making a decision.

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