As long as there is relevant growth in the number of derivative contracts currently in play (open interest), it generally means that there are more traders involved.
In the futures markets, long and short positions 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), this indicator has often anticipated price drops that exceed the billion dollar mark.
The April 17 crash occurred after the DOT hit its all-time high of $ 48.30, leading to a futures open 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 renewed his all-time high at $ 49.80. This time, there was a 68% drop over the next five days. Consequently, open futures interest reached a 4-month low at $ 220 million.
Notice how Polkadot's 28% rally in the first two days of November led to an all-time high of $ 53.30 and also carried the derivatives indicator above the $ 1 billion mark.
The 18.9 million DOT development fund Announced on October 17, it accentuated the already existing rally ahead of the parachain auctions expected in mid-November. According to Polkadot founder Gavin Wood, the $ 960 million grant will be used to build, enhance and educate the network's growing ecosystem.
The projects are currently raising capital to parachain auctions and Polkadot investors who wish to support any of them must lock their DOT in a sponsored account. In return, investors receive airdropped tokens from the project competing for the parachain slot.
What about the $ 54 billion question?
Does the current billion dollar "death mark" in Polkadot's open futures interest indicate a potential collapse or will it be different this time?
As explained above, the open interest metric cannot be considered bullish or bearish independently. Therefore, to understand whether derivatives traders are using excessive leverage, one must analyze the perpetual futures contract data.
This instrument is the preferred derivative of retail traders because its price tends to follow the regular spot markets.
To balance your risk, exchanges will charge a funding fee to the side that demands the most leverage and this fee will be paid to the opposite side.
Neutral markets tend to show a positive financing rate of 0% to 0.03%, equivalent to 0.6% per week, which indicates that longs are the ones paying it. The average rate before the May 15 crash was slightly higher at 0.075%, which is about 1.6% per week. At this time, longs were not desperate to close their positions and there were no signs of excessive leverage.
Related: Polkadot expecting $ 100 now? DOT price rises 25%, triggering a classic bullish chart pattern
The only possible conclusion is that a widespread market crash caused investors and algorithm 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 at 0.05%. This is a bit optimistic and not approaching the levels that are considered worrisome. At the moment, there are no signs of a possible collapse due to open interest in billion dollar futures.
The views and opinions expressed here are solely those of the Author and do not necessarily reflect the views of Cointelegraph. Every investment and trade movement involves risk. You should do your own research when making a decision.
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