6.1 Open Interest and Funding
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Open interest (OI) is a statistical measure of market activity, it measures the flow of money into the futures and options market.
While it is more commonly measured in the stock market, Open Interest is now being utilised by expert traders in the cryptocurrency derivatives market.
Open Interest is also useful to identify the strength of macro trends.
Knowing the Open Interest can reveal details behind a candlestick.
Open interest (OI) is a statistical measure of market activity, it measures the flow of money into the futures and options market.
While it is more commonly measured in the stock market, Open Interest is now being utilised by expert traders in the cryptocurrency derivatives market.
Open Interest is also useful to identify the strength of macro trends.
Knowing the Open Interest can reveal details behind a candlestick.
For example; is an uptrend truly bullish with new money coming in? Or did short positions closing cause the price to rise?
You won't typically see funding rates if you're spot trading stocks and cryptocurrency, their relevance is directed towards futures, options, and perpetual swaps.
Before a futures contract is due to expire the price could deviate from the spot price. The difference between the contract price and the spot price is referred to as the 'Basis of the futures contract'.
Eventually, it will reach the point of zero as the contract reaches a settlement point.
ByBit offers perpetual swaps that do not have an expiry date, so they have to create a mechanism to supplement the 'Basis' to tether the last traded price to the spot price.
This is where funding comes into play. Funding helps ByBit ensure that the last trade price remains anchored to the overall global spot price.
Bybit's funding rate is comparable to the interest cost for holding contracts for margin trading.
It is important to note that ByBit does not gain anything from these funding rates, as they are directly exchanged between long and short positions.
However, even if you're not trading contracts on ByBit, knowing the funding rate can contribute to your analysis.
This tutorial will provide you with an in-depth walkthrough of where to look for Open Interest and funding rates, and how to use them to identify strengths and weaknesses in the price action.
Key Points of the Lesson
UTILITY
Open Interest is a great metric to track when trading a macro trend. OI is used to monitor the “health” of the trend.
There can be “patterns” in Open Interest. Past example: When reached the 1 billion level there used to be a big drop in OI.
Funding can influence the price and is an important metric to track and understand.
OPEN INTEREST
Open Interest = total number of outstanding contracts in a derivative pair .
Open interest increase/decrease shows money entering/leaving the market.
Can be tracked on all time frames.
Can be tracked on software such as Exocharts or Atas (free).
FIRST PRACTICAL EXAMPLE
FUNDING
Funding helps to maintain perpetual derivatives prices close to the spot price.
Positive funding ⇒ longs pay shorts.
Negativer funding ⇒ shorts pay longs.
Funding can help identify a crowded trade ⇒ context is key.
SECOND PRACTICAL EXAMPLE
TIPS & TRICKS OPEN INTEREST
Price rising, Volume and OI increasing ⇒ strong uptrend, bullish.
Price rising, Volume and OI decreasing ⇒ weak uptrend, bearish.
Price declining, Volume and OI increasing ⇒ strong downtrend, bearish.
Price declining, Volume and Oi decreasing ⇒ weak downtrend, bullish.
TIPS & TRICKS FUNDING
Funding is used to encourage traders to open/close derivative positions when there are (extreme) differences between spot and futures price.
Possible to close a position one minute before Funding and avoid paying.
Neutral funding rate ⇒ 0.01%
Extreme when >0.075% or below -0.075%.
TAKE HOME MESSAGE
Open interest ⇒ monitor health of a trend on all time frames.
Funding ⇒ can influence the price, it attempts to eliminate the price difference between spot VS futures.
Context is crucial.