What is open interest?

Think of a board that counts how many agreements are still in force, not how many were signed during the day. That is what open interest tracks. It applies to derivatives, such as futures contracts, perpetual futures with no expiry date and options.

Every contract has two sides: a buyer and a seller. In open interest, a contract counts once, not twice. If two participants open a new contract with each other, the total rises by one. If they close both sides of an existing contract, it falls by one. If one leaves and someone else takes over their position, it can stay unchanged.

This is also where it differs from trading volume. Volume counts all the contracts that changed hands over a period. Open interest is a snapshot of those still open at a given moment. So there can be a lot of trading without any increase in outstanding contracts.

Why it matters

For anyone following the crypto market, it shows how much activity remains open in derivatives. A rise means more outstanding contracts, a fall means fewer. On its own, it doesn’t show whether the market expects a rise or a fall, since every contract has both sides.

We see it as a useful complementary data point, alongside price, volume and the funding rate, i.e. the periodic payments between position holders in perpetual futures. Even if you only buy on the spot market, it concerns you: forced liquidations of leveraged positions can amplify market moves.

What to watch out for

Check the unit of measurement first. One platform may show the number of contracts, another the amount of crypto and another the value in dollars. If the coin’s price rises, the dollar value of open interest can increase without any more contracts being opened.

Also check which exchanges and which products the metric covers. High open interest doesn’t by itself prove high leverage, nor does it necessarily foreshadow mass liquidations.