Santiment recorded a drop in open interest in Bitcoin futures to August levels. The platform reported this on the morning of November 14.
Santiment is an analytics platform that tracks crypto market data. Open interest is the total sum of all open futures positions.
For a trader, this news is about leverage. Borrowed volume is leaving the market, and this changes the character of price movements.
What does this indicator show?
- Rising - more leveraged trades appear in the market. Leverage, that is, trading with borrowed exchange funds.
- Falling - positions are being closed. Either traders exit on their own, or they get wiped out by liquidation.
- Liquidation - forced closure of a position by the exchange when the collateral for the trade is no longer sufficient.
Why is this called a cleanse?
- Santiment's wording. The platform calls what is happening a cleansing of the market from excess leverage and notes that the process is gaining momentum.
- A return to August. All the leveraged volume accumulated over the autumn has already been removed from the market.
What does this mean for a trader?
Length of cascades. The thicker the layer of leveraged positions, the longer the chains of wipeouts: one liquidation pushes the price down and triggers the next.
Key point: when there is little leverage in the system, there is less fuel for chain liquidations. But impulses without leveraged support also develop differently.
What to watch next?
- BTC open interest next to the price chart. Divergence between them usually warns that overheating has built up in the market again.
- Your own tool for such a market. How the risk and leverage rules work on a prop company account is covered in the academy, and the calculator selects a challenge to match your trading style.
Leverage as a substitute for account size
Leverage is most often taken because of a small account: on two thousand dollars, without ×20, movement isn't felt at all. Hence the liquidations that Santiment now considers a cleansing of the market. In prop trading the problem is solved from the other side: the trading account is issued by the company to those who pass a paid evaluation, and the earnings are split according to a pre-agreed share. A large notional removes the need to squeeze out percentage with extreme leverage, and while there is little leverage in the market, it's the right time to look at how this scheme works.