Ethereum price crashes often occur after peaks in ETH open interest. Will history repeat itself?

Ethereum (ETH) rose 8.8% between October 14 and 15, but the $2,650 resistance level is proving more difficult than expected. Traders are increasingly concerned that Ethereum futures open interest, which hit an all-time high on October 16, could be a warning sign.

A surge in demand for leveraged ETH positions usually precedes a serious price correction. On October 15, the total Ethereum futures tradable market exceeded 5 million ETH for the first time, a 12% increase from four weeks ago.

On August 2nd, when Ethereum’s total open interest peaked, the price of ETH plummeted 31.7% in less than four days, falling from $3,205 to $2,186. Will history repeat itself this time?

Increasing demand for ETH futures does not necessarily mean weakness.

High demand for ETH futures does not necessarily indicate a downtrend, so the key insight from this data is whether system-wide leverage is expanding or contracting. The larger the bet, the greater the chance of sudden price fluctuations due to forced liquidation.

Derivatives markets may seem like a zero-sum game, but their impact on spot prices is significant. This is primarily because futures contracts tend to trade at much higher volumes due to leverage. Whales and market makers also rely on derivatives to quickly hedge their exposure. This is a nearly impossible process in the spot market due to the low liquidity available.

If a forced liquidation of more than $50 million occurs in the futures market, the arbitrage desk immediately reduces the risk in the spot market. This action further accelerates price movement, either upward or downward, creating an effect called a “cascading liquidation.” This is why traders monitor open interest to detect the risk of excessive leverage leading to unexpected price movements.

Open interest peaked at 4.75 million ETH on August 2, up 15% from four weeks ago. In essence, current market conditions closely resemble the August structure. A total of $279 million in leveraged long positions were forced to liquidate. This excludes traders who used stop-loss orders or voluntarily closed their positions during the period.

Another example is April 1, when open interest surpassed 4 million ETH, a 21% increase in four weeks. In this case, the price of Ethereum started at $3,648 and eventually bottomed at $2,604 on April 13, a 24% decline over 12 days. Therefore, there is ample historical evidence to indicate that the peak formation of Ether open interest usually precedes strong price corrections.

relevant: Bitcoin dominance reached its highest level in 3.5 years as altcoins lagged behind.

Bitcoin and broader market trends could set the tone for ETH price.

While post-mortem analysis makes it easy to identify local highs on Ether’s open interest chart, there is no way to predict whether this number will continue to grow and exceed 5.1 million ETH. The most recent examples of these peaks have occurred while the broader cryptocurrency market has been trading sideways or experiencing short-term corrections, which adds another layer of complexity to the analysis.

Assuming the overall cryptocurrency market trend is neutral, a 20-25% crash in the price of Ether to around $1,960 is entirely within the realm of possibility, so traders should properly prepare for such a scenario. On the other hand, if Bitcoin (BTC) finally breaks through the $70,000 resistance level, Ether’s increased use of leverage could fuel bullish momentum, potentially leading to a higher price.