What Is Open interest?
Open interest is the total number of outstanding derivative contracts — such as futures or perpetual future contracts — that have not been settled or closed. Each open contract has both a buyer (long) and a seller (short), so one contract equals one unit of open interest. Open interest increases when a new buyer and a new seller enter a trade, and decreases when an existing long and an existing short close their positions against each other.
Open interest is a key measure of market activity and liquidity. Rising open interest alongside rising prices typically signals new money entering the market and strengthening the current trend, while declining open interest suggests positions are being unwound. In cryptocurrency perpetual future markets, a rapid spike in open interest can indicate excessive leverage building up, often preceding liquidation cascades when the market reverses.
Open interest differs from trading volume: volume counts every contract traded during a period (including contracts that are opened and closed within the same session), whereas open interest only counts contracts that remain open at the end of the period.
Relationship between open interest and funding rate
Open interest and funding rate are deeply interconnected in perpetual future markets — open interest measures how many contracts are open, while funding rate reflects the directional imbalance between longs and shorts holding those contracts.
Rising open interest + rising funding rate: New leveraged long positions are being opened faster than short positions. Demand to go long pushes the perp price above spot, widening the premium and driving funding higher. This is a classic bull market signal but also a warning of crowded positioning — if the price reverses, these overleveraged longs face liquidation, which forcefully closes their positions, causing open interest to collapse and funding to reset or go negative.
Rising open interest + falling/negative funding rate: New short positions are being opened aggressively. The perp price trades below spot (backwardation), and shorts must pay longs. This pattern appears during sharp sell-offs or when traders are hedging spot exposure.
Falling open interest + normalising funding rate: Positions are being unwound on both sides. As longs and shorts close against each other, the directional imbalance decreases and funding converges toward the baseline rate. This often follows a liquidation cascade or the end of a strong trend.
High open interest + extreme funding rate: A dangerous combination. Large open interest means many contracts are outstanding, and an extreme funding rate means one side is heavily dominant. The cost of holding the crowded side (paying high funding) erodes margin, while a price reversal can trigger a liquidation chain reaction — each forced closure pushes the price further against remaining positions, triggering more liquidations in a cascading effect that rapidly drains open interest.
Traders and market neutral strategists monitor both metrics together: open interest reveals the magnitude of market exposure, while the funding rate reveals which side is paying for the privilege of holding that exposure.
See also