The open interest in Bitcoin perpetual has increased to around 500k over the past week, reaching all-time highs relative to BTC’s market cap. The funding rate regime sits at near-neutral rates, implying that the growing leverage is caused by a balanced demand for both upside and downside exposure.

Therefore, while the market seems prepared for a squeeze, the direction of the breakout is not clear due to the near-neutral funding rates.

Bitcoin OI Surges to ATH Relative to Market Cap

The open interest in Bitcoin perpetual increased from 428k to 498k over the past week, according to a recent report by crypto research and analysis firm Arcane. The report noted that the growing leverage is driven by a balanced demand for both upside and downside exposure, leading to near-neutral rates.

“In general, the market seems ripe for a squeeze, but assessing the direction based on funding rates provides little directional information. In this climate, it might be wise to avoid adding risk through leverage in the market.”

The report called the recent growth in open interest “parabolic,” claiming that it shows no signs of stopping. Notably, this trend is not new. The growing open interest in the market has been a trend since June this year and has only escalated more recently. The open interest has more than doubled in notional terms since mid-April.

Relative to market cap, the Bitcoin OI is at all-time highs. This level of leverage is unusual in perpetual swaps history, the report said, noting that there have also been similar extremes in ETH derivatives. In fact, ETH’s OI is more extreme than that of BTC.

“The gap between BTC’s and ETH’s OI to market cap ratio of 1.03% is far higher than the three-year average difference in relative OI. Since October 2019, the open interest to market cap ratio of ETH has averaged 0.46% above that of BTC.”

In trading, open interest refers to the number of open futures or options contracts for a particular market that has not been settled (offset by delivery). It serves as an indication of the strength of the market, showing whether a particular market is trending higher or lower.

Bitcoin Breakout Impending, But Direction Unclear

As open interest suggests, a breakout is imminent for Bitcoin. However, because of a balanced demand for both upside and downside exposure, the breakout direction is not clear. Dylan LeClair, a senior analyst at UTXO Management, mentioned this in a recent tweet, saying:

“As bitcoin consolidates around $20,000, BTC-denominated futures open interest sits just below all-time highs at 604k BTC. Whether up or down, when bitcoin breaks out of its current range, it’ll likely be a violent move.”

Here’s perpetual futures funding, which is just a dynamic financing rate paid between shorts and longs (that financially incentivizes traders to keep price of perps to the spot index) is basically flat.

Neither shorts nor longs are being very overaggressive here. pic.twitter.com/I6mzGY2o8P

— Dylan LeClair (@DylanLeClair_) October 6, 2022

It is worth noting that the upcoming CPI figure, which will set the stage for the Fed’s rate hike, might impact the direction of this breakout. A high CPI, which would be accompanied by another 0.75% rate hike, might prove detrimental for Bitcoin and other risk assets since the dollar would become more attractive.

Meanwhile, Bitcoin and the broader crypto market have been trading sideways for more than a month now. The flagship cryptocurrency is currently trading at just over $19,000, while the second-largest cryptocurrency is trading at around $1,300, both down by more than 70% compared to their all-time highs.

This article originally appeared on The Tokenist

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