Ethereum Price Crashes Often Follow ETH Open Interest Peaks – Will History Repeat?

Ether (ETH) gained 8.8% between October 14 and 15, but the $2,650 resistance level proved more challenging than expected. Traders are becoming increasingly concerned that Ether's futures peak on October 16 could be a warning flag.

This high demand for ETH space precedes major price corrections. On October 15th, for the first time ever, the total Ether futures market exceeded 5 million ETH, representing a 12% increase from four weeks ago.

In the year On August 2nd, the last time Ether's total open interest was high, the ETH price fell 31.7% in less than four days, falling from $3,205 to $2,186. Will history repeat itself this time?

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The high demand for the future of ETH is not necessarily boring

High demand for ETH futures isn't necessarily boring, so the key insight from this data is whether systemic interest is expanding or being depleted. The larger the bets, the greater the chance of sudden price movements due to forced liquidation.

Although derivatives markets appear to be zero-sum games, their impact on spot prices is significant. This is mainly because the futures contracts trade at higher volumes due to leverage. Additionally, whales and market makers rely on contracts to quickly hedge exposure, a process that is not possible in low-liquidity spot markets.

Arbitrage desks immediately de-risk the spot markets when forced liquidations of $50 million or more occur in the futures markets. This action further accelerates price movement – either up or down – creating an effect known as the “elimination process”. That's why traders monitor open interest to identify the risk of excessive leverage leading to unexpected inflation.

In the year On August 2, open interest increased to 4.75 million ETH, a 15% increase compared to four weeks ago. Basically, the current market situation closely mirrors the structure since August. A total of $279 million was used to force long positions to be liquidated – this figure does not include traders who used stop orders or voluntarily closed their positions during this period.

Other examples include April 1st, when open interest topped 4 million ETH, up 21% in four weeks. In that case, Ether's price started at $3,648 and finally dropped to $2,604 on April 13, which was a 24% drop in 12 days. Therefore, there is ample historical evidence to show that large spikes in Ether open demand precede strong price corrections.

Related: Bitcoin dominance hits 3.5-year high as altcoins lag behind

Bitcoin and broader market trends can set the tone for ETH price

While post facto analysis makes it easy to spot local peaks in Ether's open demand charts, there is no way to predict that this number will continue to grow and exceed 5.1 million ETH. The most recent instances of such peaks have occurred when the broader cryptocurrency market is trading sideways or experiencing short-term corrections, adding another layer of complexity to the analysis.

Assuming the overall cryptocurrency market trend remains neutral, a 20% to 25% fall in Ether price to $1,960 is entirely possible, so traders should prepare for such a scenario. On the other hand, if Bitcoin (BTC) finally breaks above the $70,000 resistance level, the increase in gains in Ether could support bullishness, which could lead to price appreciation.

This article is not intended for general information purposes and should not be construed as legal or investment advice. The views, ideas and opinions expressed herein are solely those of the author and do not necessarily represent the views and opinions of Cointelegraph.