Ethereum open interest peak plunge may occur

Ethereum gained 8.8% between October 14 and 15, but resistance at $2,650 proved more challenging than expected. Traders are increasingly concerned that Ethereum’s all-time high in total futures open interest on October 16 could be a warning sign.

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

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

Increased demand for ETH futures isn’t necessarily bearish

Increased demand for ETH futures is not necessarily bearish, so the key insight to draw from this data is whether system-wide leverage is expanding or contracting. The larger the bet, the greater the likelihood of sudden price movements due to forced liquidations.

Although derivatives markets may seem like a zero-sum game, their impact on spot prices is significant. This is mainly because futures contracts tend to be traded in much larger volumes due to leverage. In addition, whales and market makers rely on derivatives to quickly hedge their risks, a process that is almost impossible to achieve in the spot market due to its low liquidity.

When a forced liquidation of $50 million or more occurs in the futures market, arbitrage desks immediately reduce risk in the spot market. This action further accelerates price movements—both up and down—creating an effect known as “cascading liquidations.” This is exactly why traders monitor open interest to detect the risk of excessive leverage leading to unexpected price moves.

On August 2, open interest peaked at 4.75 million ETH, up 15% from four weeks ago. In essence, the current market situation is very similar to the structure in August. A total of $279 million in leveraged long positions were forced to liquidate - a figure that does not include traders who used stop-loss orders or voluntarily closed their positions during this period.

Other examples include the fact that on April 1, open interest surpassed 4 million ETH, a 21% increase in four weeks. At that time, the price of Ether started at $3,648 and eventually bottomed out at $2,604 on April 13, a 24% drop in 12 days. Therefore, there is enough historical evidence to show that peaks in Ether open interest usually precede significant price corrections.

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

While hindsight analysis can more easily identify localized peaks in the ETH open interest chart, it is impossible to predict whether the number will continue to grow and exceed 5.1 million ETH. Recent instances of such peaks have occurred when the broader cryptocurrency market was moving sideways or experiencing short-term corrections, adding another layer of complexity to the analysis.

Assuming the overall trend of the cryptocurrency market remains neutral, a 20% to 25% plunge in the price of Ethereum to around $1,960 is entirely possible, so traders should be prepared for this scenario. On the other hand, if Bitcoin eventually breaks through the $70,000 resistance level, the increased use of leverage in Ethereum could favor bullish momentum, which could lead to price appreciation.