There was a time when BitMEX derivatives exchange reigned sovereign over other exchanges, and the company effectively held a 50% market share until July 2019. For this reason, traders kept a close eye on every indicator connected to BitMEX, including its funding rate, open interest, and basis.
Open interest measures the total number of contracts held by market participants. As the figure rises higher, so does the potential size of liquidations. On Aug. 2, a $1,400 crash happened as $1 billion in futures contracts were forcefully closed due to insufficient margins.
Although there is no magic number, traders tend to get shaky as open interest nears $1 billion, causing a phenomenon some traders refer to as the BitMEX ghost. This became evident during the second half of 2019, when massive Bitcoin price crashes occurred on seven different instances when open interest tops $1 billion.
The perceived risk associated with high open interest depends on how liquid the underlying asset is. During the third quarter of 2019, Bitcoin’s regular volume on spot exchanges averaged $2.4 billion per day. Thus, a single contract totaling 42% of the Bitcoin volume seemed sizeable enough.
Bitcoin price vs. BitMEX perpetual open interest, USD. Source: TradingView
As the chart above depicts, there is little doubt that open interest near $1 billion coincided with relevant price crashes from July through September. It is worth noting that a notable number of contracts in play cannot be deemed bullish or bearish.
The second half of 2019 was mostly bearish
The latter half of 2019 was quite rough for cryptocurrencies, and as most investors will recall, even President Trump publicly bashed Bitcoin, as reported by Cointelegraph. All this happened while the United States Treasury Secretary Steven Mnuchin demanded additional regulation and oversight for the sector.
Aggregate Bitcoin futures open interest on Nov. 2019, USD. Source: Skew
The chart above shows much better detail of how relevant BitMEX’s 40% market share was back then. A single exchange held an open interest equivalent to half of Bitcoin’s daily spot volume.
Fast forward to 2020, and BitMEX has been dethroned by OKEx, where the total open interest on perpetual and fixed-month futures surpassed $1 billion on July 25.
Aggregate Bitcoin futures open interest, USD. Source: Skew
The remaining contenders kept growing their share, but it was only recently that Chicago Mercantile Exchange (CME), Binance, and Bybit managed to break the psychological $1 billion barrier.
Today’s market marginally resembles 2019, but with less risk
Oddly enough, this happened on Nov. 20, just four days ahead of the 16% crash to $16,334. The total futures open interest on Sept. 2019 totaled $3 billion to put things in perspective. This time around, four exchanges were able to break the $1 billion barrier.
Although futures open interest grew to $7.4 billion, so did the daily average volume on regular spot exchanges where the figure now reads $3.5 billion. Thus, unlike the previous year, a single exchange holding a $1 billion open interest should not raise eyebrows in the same manner that it did in 2019.
To sum up, the markets have grown and developed to the extent that the BitMEX ghost is gone but it might have been replaced by a similar phenomenon that occurs when four exchanges cross the $1 billion futures open interest mark.
Regardless, one should keep a close eye on such an indicator from now on as those four exchanges have replaced BitMEX as the market leader. Combined, Binance, CME, OKEx, and Bybit hold over half of the futures’ open interest. Although such a coincidence has only happened once, it indeed mimics the $1 billion effect from the past.