I came across below explanation regarding BTC Open Interest and it is really explained well!
I am sharing here(I did not write this)!!!
What is bitcoin open interest?
Bitcoin open interest refers to the total number of outstanding Bitcoin futures or options contracts in the market. It is a measure of the amount of money invested in Bitcoin derivatives at any given time.
Bitcoin futures and options contracts allow traders to speculate on the price movements of Bitcoin without having to own the underlying asset. When traders enter into Bitcoin futures or options contracts, the open interest increases. As contracts are closed out or expire, the open interest decreases.
The Bitcoin open interest can provide insight into the sentiment of market participants towards the cryptocurrency. For example, a rising open interest may indicate growing bullish sentiment among traders, while a falling open interest may indicate growing bearish sentiment.
People often say that there are "more buyers" or "more sellers" in a particular market, but this is not accurate.
For Open Interest, it's important to understand that every buyer must have a seller, and vice versa.
To illustrate this, let's say there are three traders who meet in a newly established market with an Open Interest of 0 and a price of $100.
Trader A thinks the market will go up, while Trader B thinks it will go down.
Trader A places a limit buy order at $100, and Trader B decides to match the buy order and open a short position.
At this point, the Open Interest of the market becomes 1 due to a long and a short position being opened at the same time.
The market goes up to $150, and Trader C also decides to take a long position.
At $150, Trader A decides that $50 profit is enough and places an order to sell one of their contracts. Trader C matches this order and now holds a long contract.
Has the Open Interest changed? No.
We have one long position exiting (remember, you become a short when you sell an opening position), and one long position entering the market.
The market continues to go up, and at $200, Trader B decides to exit.
Trader B places a limit buy order at $200, and Trader C decides to match the order for a $50 profit.
In this case, both Trader B and Trader C exit their positions, and the Open Interest drops back down to 0.
In this example, you can see that there are three possible outcomes for Open Interest.
1.If both buyers and sellers increase, Open Interest will increase.
2.If both buyers and sellers close their positions, Open Interest will decrease.
3.If one side opens new positions while the other is closing their positions, Open Interest remains the same.
So why does the underlying asset price change when every buyer must be a seller (and vice versa)?
One of the reasons why trading in most markets is relatively easy is that there are market participants who are Delta-neutral.
Overall, Bitcoin open interest is an important metric in the cryptocurrency market, as it provides valuable insights into market sentiment, trading activity, and liquidity.
