A multiyear review of Litecoin futures open interest reveals a unique trend that has significantly impacted the LTC price in the past.
With less than two weeks until Litecoin’s halving, when the miner’s block subsidy will be cut in half, traders are questioning whether the additional scarcity effect will be enough to sustain the LTC price above $90.
Litecoin’s (LTC) price has declined by 19% in the last 18 days, but it has shown a positive 31% performance this year. Notably, most gains occurred between June 29 and July 2, with a 34% rally pushing the price to a 14-month high of $115.
However, there’s an alarming statistic coming from the derivatives market that indicates a sharp correction is likely underway.
Historical data doesn’t favor Litecoin bulls
Each of the previous three instances where Litecoin futures open interest dropped below $500 million caused price drops of 38% or higher, which potentially matches the current scenario.
Litecoin futures’ aggregate open interest in dollars from June 29 ($300 million) to July 2 ($615 million) shows there was a significant surge, indicating increased demand for leveraged futures contracts.
On July 2, Litecoin’s price reached a 14-month high but subsequently declined 20% to $92. However, the concerning aspect is Litecoin’s open interest remaining above the $500 million mark. This suggests buyers added margin to avoid liquidation, yet the risk of a sharp correction persists.
Higher active contracts (open interest) are generally positive, enabling investors who require a specific market size to participate. Even if it’s not necessarily bullish for price momentum, it allows for larger price swings due to leverage and potential liquidations when a trader’s position is closed due to a lack of margin.
A look back at the November 2021 crash and open interest
Litecoin’s open interest dropping below the $500 million threshold seems a reliable indicator of investors’ diminished interest, and the three latest occurrences confirm the thesis, as its price faced drastic corrections in each instance.
On Nov. 10, 2021, Litecoin’s open interest surpassed $500 million, coinciding with a six-month price high of $289. Interestingly, Litecoin’s price crashed 48% in the 24 days after open interest dropped below $500 million on Nov. 14, 2021.
Previously, Litecoin’s open interest had surged but failed to break the $500 million mark, and even a 40% price gain to $232 in early September couldn’t break that barrier.
Further confirming the relevance of open interest, two other instances occurred in 2021 between February and June, marking significant drawdowns after breaking the futures open interest $500 million threshold.
Similar events in February 2021 and May 2021
On Feb. 8, 2021, Litecoin’s open interest surged above $500 million, marking a 64% price gain, which peaked at $247 on Feb. 20, 2021. However, on the same day, open interest dropped below $500 million, leading to a 38% price decline in the next eight days. Notably, the $200 psychological price support held for five days before the Litecoin price declined to $142.
Again, on May 9, 2021, Litecoin’s open interest fell below $500 million after 49 days. It reached an all-time high of $409 during that period, followed by a 71% correction in just 13 days, settling at $118.
Though causation cannot be drawn from events of over 19 months ago, it’s essential to keep an eye on Litecoin’s open interest. If it declines from the current $500 million level, history suggests a potential 30% drawdown from $94 to $62.
This article does not contain investment advice or recommendations. Every investment and trading move involves risk, and readers should conduct their own research when making a decision.