With less than two weeks to go until Litecoin’s halving, when the block subsidy for miners is halved, traders are wondering whether the impact of the additional halving will be enough to keep the LTC price above $90.
Litecoin (LTC) price has declined by 19% in the last 18 days but has shown a positive performance of 31% this year. Notably, most of the gains occurred between June 29 and July 2, with a 34% rally to take the price to a 14-month high of $115.
However, a worrying data is emerging from the derivatives market which shows that a sharp correction is likely.
Historical Data Does Not Favor Litecoin Bulls
In each of the last three instances where open interest on Litecoin futures fell below $500 million, the price declined by 38% or more, which may be consistent with the current scenario.
The total open interest in USD-denominated Litecoin futures from June 29 ($300M) to July 2 ($615M) showed a significant increase, indicating increased demand for leveraged futures contracts.
On July 2, the price of Litecoin reached a 14-month high, but then fell by 20% to $92. However, the worrying aspect is that Litecoin’s outstanding interest remains above the $500 million mark. This suggests that buyers have added margin to avoid liquidation, but the risk of a sharp decline remains.
High active contracts (open interest) are generally positive, allowing participation from investors who require a specific market size. Even though this is not necessary for price movement, it allows for greater price volatility due to leverage and possible liquidation when a trader’s position is closed due to a lack of margin.
A look at the November 2021 crash and outstanding interest
Litecoin’s drop in outstanding interest below the $500 million threshold seems to be a reliable indicator of a lack of investor interest, and the three latest events reflect this as the price has corrected heavily in each case.
On November 10, 2021, Litecoin had over $500 million in outstanding interest, coinciding with a six-month high of $289. Interestingly, on November 14, 2021, after the outstanding interest on Litecoin fell below $500 million, its price dropped by 48% in 24 days.
Prior to this, Litecoin’s open interest had risen but failed to break the $500 million mark, and even a 40% price surge in early September to $232 failed to break that barrier.
Confirming the relevance of outstanding interest, two more cases occurred between February and June in 2021, marking significant withdrawals after breaking the $500 million threshold for future outstanding interest.
Similar events in February 2021 and May 2021
On February 8, 2021, the outstanding interest on Litecoin rose above $500 million, leading to a 64% increase in price, reaching $247 on February 20, 2021. However, on the same day, outstanding interest fell below $500 million, causing the price to decline by 38% over the next eight days. Notably, the psychological price support at $200 held for five days before Litecoin price dropped to $142.
Then, on May 9, 2021, Litecoin’s outstanding interest dropped below $500 million after 49 days. In that period it reached an all-time high of $409, followed by a 71% correction to $118 in just 13 days.
Although a causal relationship cannot be drawn from the events of more than 19 months ago, it is necessary to keep an eye on the direct interest in Litecoin. If it breaks down from the current $500 million level, history suggests a potential 30% drop from $94 to $62.
This article does not constitute investment advice or recommendations. Every investment and trading move involves risk and readers should do their own research when making decisions.
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