According to a report by Bloomberg, JPMorgan Chase analysts, including Nikolaos Panigirtzoglou, recently released a research note suggesting that the cryptocurrency market is likely to stabilize in the near term. The report attributes this outlook to a decline in open interest in CME Bitcoin futures contracts, which usually signals a weakening price trend. The analysts believe the recent selloff in the crypto market, which saw Bitcoin’s price drop by almost 12% in the past two weeks, is nearing its end.

Source: TradingView

Open interest refers to the total number of outstanding derivative contracts, such as futures and options, that have not been settled. In the context of futures markets, it represents the number of contracts that are held by market participants at the end of each trading day. Open interest is different from trading volume, which counts the number of contracts traded during a specific time period. While trading volume shows the level of activity or liquidity in the market, open interest indicates the flow of money into the futures market, providing a measure of market participation or strength.

Traders often use open interest as a tool to gauge market sentiment and potential changes in trends for several reasons:

  1. Confirmation of Trend: An increase in open interest along with an increase in price usually confirms an existing upward trend. Conversely, an increase in open interest, along with a decrease in price confirms a downward trend.
  2. Reversal Signals: A decline in open interest alongside a price decline suggests that a downward trend is likely ending. Similarly, if the price is rising, but open interest is falling, it could indicate that the upward trend is nearing its end.
  3. Strength of Price Moves: High open interest in a market or contract often means that the price moves are more likely to be significant and sustainable. Low open interest may indicate a lack of confidence or interest in a particular price move, making it less likely to sustain.
  4. Market Liquidity: Higher open interest usually means better liquidity, which allows traders to enter and exit positions more easily.
  5. Volume vs. Open Interest: Comparing volume changes with open interest changes can provide additional insights. For example, rising volume along with rising open interest can indicate strong trend support, while declining volume with rising open interest might suggest a potential reversal.
  6. Imbalance of Supply and Demand: Extreme levels of open interest might indicate overbought or oversold conditions, which could precede a market reversal.

By carefully analyzing changes in open interest in conjunction with other market indicators and price action, traders can make more informed decisions about the market’s likely direction.

The Bloomberg report also looks into the factors that initially triggered the selloff. Earlier in the summer, the crypto market experienced a surge in positive sentiment fueled by several developments. These included a series of applications for the first U.S. exchange-traded funds (ETFs) tied to Bitcoin’s spot price, led by BlackRock Inc., and a court ruling favorable to Ripple Labs in its ongoing legal battle with the Securities and Exchange Commission (SEC).

However, the initial enthusiasm has waned as traders await decisions on Bitcoin ETF approvals and as the SEC prepares to appeal the court ruling on Ripple. This has introduced a new layer of legal uncertainty, making the crypto market more sensitive to future developments.

The report also points out that the crypto market’s pullback is partly due to a broader correction in risk assets, such as equities. This correction has been influenced by factors like the tech sector’s frothy positioning, rising U.S. real yields, and concerns about China’s economic growth. On a related note, Federal Reserve Chairman Jerome Powell recently indicated that the U.S. central bank is prepared to raise interest rates further if needed, which also had an impact on risk assets.

The JPMorgan analysts concluded that the unwinding of long positions in the crypto market is mostly complete, limiting the downside for cryptocurrencies in the near term.

At the time of writing, Bitcoin is trading at around $26,046, up 0.20% in the past 24-hour period.