Over the past two years Bitcoin (BTC) futures trading on CME (Chicago Mercantile Exchange) has grown in importance for institutional investors. However, a popular misconception among traders is to attribute an unwarranted amount of importance to futures market activity and its impact of spot prices. It is important to highlight that despite trading under the BTC ticker, CME futures are financially-settled and therefore does not involve the actual exchange of Bitcoins.
Lately, the topic of open interest on Bitcoin options has been an extremely popular topic of discussion in crypto media and crypto Twitter but from what I can see, many investors misunderstand how the metric works and what it means in relations to Bitcoin price action.
In simple terms, open interest is the total number of futures contracts held by market participants. For every trade that goes through CME, a client must be willing to long, hoping for an uptrend, while the other party necessarily will be shorting the instrument.