Data shows Polkadot crashes after hitting $ 1 billion open interest – will it happen again?

Whenever there is a significant growth in the number of derivative contracts currently in play (open interest), it usually means that more traders are 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 demand a minimum market size.

However, in the case of Polkadot (DOT), price drops were often anticipated by this indicator exceeding the billion dollar mark.

Polkadot price in USD at Bitfinex. Source: TradingView

The April 17 crash occurred after DOT hit its all-time high of $ 48.30, which led to open term interest of $ 1.2 billion. Over the next week, 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 its all-time high at $ 49.80. This time around, a 68% crash followed over the next five days. As a result, open term interest hit a 4-month low at $ 220 million.

Interest open to term on the Polkadot aggregate. Source: Coinglass.com

Note how Polkadot’s 28% rally in the first two days of November led to a record high of $ 53.30 and also took the derivatives indicator above the billion dollar mark.

The 18.9 million DOT development fund announced on October 17 added to the rally already in place 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 network ecosystem.

The projects are currently raising capital to launch their parshain auctions, and Polkadot investors who wish to support one of them must lock their DOT into a sponsored account. In return, investors are rewarded with tokens air-dropped from the project competing for the parachain slot machine.

What about the $ 54 billion question?

Does the current $ 1 billion ‘death threshold’ on Polkadot futures signal a potential crash or will it be different this time around?

As explained earlier, the measure of open interest cannot be viewed as bullish or bearish on a stand-alone basis. So, to understand whether derivatives traders are using excessive leverage, one needs to analyze perpetual futures data.

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

To balance their risks, the exchanges will charge a funding rate to the party that requires the most leverage and these fees are paid to the opposing party.

Data shows Polkadot crashes after hitting $ 1 billion in open interest - will it happen again?
8 hour funding rate for Polkadot perpetual futures in May. Source: Coinglass.com

Neutral markets tend to show a positive finance rate of 0% to 0.03%, equivalent to 0.6% per week, indicating that buyers are paying it. The average rate before the May 15 crash was a little higher at 0.075%, or about 1.6% per week. At this time, buyers weren’t desperate to close their positions and there was no sign of excessive leverage.

Related: Is Polkadot considering $ 100 next? DOT price jumps 25%, triggering classic bullish chart pattern

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

Another comforting data for Polkadot holders is the current 8 hour DOT funding rate at 0.05%. This is slightly optimistic and far from the levels that are considered to be of concern. At this time, there are no signs of a potential crash due to the $ 1 billion open term interest.

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 move involves risk. You should do your own research before making a decision.


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