Bitcoin and Ethereum rally amid soaring open interest, but signs of overheating prompt caution. Market parallels with 2021 raise concerns. Stay informed and cautious amid crypto market excitement.
As Bitcoin (BTC) and Ethereum (ETH) continue their upward momentum, the resurgence in open interest for both assets is reminiscent of the fervent days of the 2021 rally. This surge in trading activity signals the full swing of the bull market. However, the parallels with 2021 also hint at potential overheating in the market, suggesting further volatility for BTC and ETH prices.
While we're not yet at the all-time highs we anticipate later in the cycle, investors should exercise caution at these elevated prices. Bitcoin has surged by over 50% in the past month, nearing its ATH, while Ethereum has seen a remarkable 50% increase during the same period.
But it's not just the rapid price appreciation that indicates imminent volatility in these major crypto assets. Technical indicators such as open interest and Bitcoin funding rates, when considered collectively, paint a picture of a rather frothy market.
Recently, the funding rates in Bitcoin perpetual futures on Binance exceeded 100% for the first time in at least a year, suggesting a bullish bias in leverage. Additionally, the rising open interest signifies a surge in the volume of open BTC and ETH derivatives positions on exchanges, encompassing both long and short positions in futures or options contracts. Elevated funding rates, extreme price movements, and rising open interest often serve as a warning sign for traders, especially those employing leverage.
On March 4, open interest in Bitcoin reached $31 billion, surpassing the previous record of $24.3 billion set on April 14, 2021. Similarly, open interest in ETH futures approached $12 billion, nearing the peak of $13 billion observed on November 9, 2021.
Comparing these metrics to 2021, it's evident that BTC and ETH may need a period of consolidation. Bitcoin has surged over 180% in the year leading up to March 4, surpassing its previous record in several major currencies. Meanwhile, ETH has risen over 120% in the same period.
There are several reasons for Ether trailing behind Bitcoin in terms of price movements, including the forthcoming deadline for a spot ETH ETF approval, which is still a few months away. Anticipation of this historic decision is likely to drive further price appreciation. Similarly, the upcoming Bitcoin halving scheduled for next month is expected to catalyze further price increases, if historical patterns hold true.
Despite the rising open interest and funding rates, the fundamentals around BTC and ETH remain unchanged — fresh all-time highs are still highly probable this cycle. However, the frenzied trading activity isn't solely driven by professional traders or long-term crypto believers; it also reflects a surge in FOMO, which can lead to short-term market instability.
In such exuberant markets, it's crucial to maintain a solid strategy and adhere to it, without succumbing to emotions. For options traders, this entails monitoring charts and data, not solely relying on bullish indicators. For buy-and-hold investors, it's crucial to remember the volatile nature of crypto assets, with signs pointing to further volatility ahead.
Most importantly, it serves as a reminder for anyone involved in crypto to remain composed and avoid being swept away by the excitement of soaring asset prices. There will be ample opportunities for excitement in the months ahead. Those who remain calm amidst market fluctuations are poised to be the most successful in this bull run.
This article provides general information and should not be construed as legal or investment advice. The opinions expressed here are solely those of the author and do not necessarily reflect the views of Cointelegraph.