Traders and investors are closely watching Litecoin’s upcoming halving event, where the miner’s block subsidy will be cut in half, to see if it will have enough of a scarcity effect to sustain the price above $90. Litecoin’s price has experienced a 19% decline in the past 18 days but has shown a positive 31% performance this year. The most significant gains occurred between June 29 and July 2, with a 34% rally pushing the price to a 14-month high of $115.
However, there is a cause for concern coming from the derivatives market, indicating a potential sharp correction. Previous instances where Litecoin futures open interest dropped below $500 million have resulted in price drops of 38% or higher, similar to the current scenario. The aggregate open interest in Litecoin futures from June 29 to July 2 showed a significant surge, indicating increased demand for leveraged futures contracts.
Despite reaching a 14-month high on July 2, Litecoin’s price subsequently declined 20% to $92. The concerning aspect is that the open interest remained above the $500 million mark, suggesting that buyers added margin to avoid liquidation. However, the risk of a sharp correction still persists.
Higher active contracts, or open interest, are generally seen as positive as they enable investors requiring a specific market size to participate. While it may not necessarily be bullish for price momentum, it allows for larger price swings due to leverage and potential liquidations when a trader’s position is closed due to a lack of margin.
Looking back at the November 2021 crash and open interest, Litecoin’s open interest dropping below the $500 million threshold has proven to be an indicator of diminished investor interest. On November 14, 2021, Litecoin’s price crashed 48% in the 24 days after open interest dropped below $500 million. Similar occurrences took place in February and June 2021, resulting in significant drawdowns after breaking the futures open interest $500 million threshold.
On February 20, 2021, Litecoin’s open interest surged above $500 million, marking a 64% price gain before dropping below the threshold and leading to a 38% price decline in the next eight days. Again, on May 9, 2021, Litecoin’s open interest fell below $500 million after reaching an all-time high of $409, followed by a 71% correction in just 13 days.
While it’s important to note that causation cannot be drawn from events that occurred over 19 months ago, it is essential to keep an eye on Litecoin’s open interest. If it declines from the current $500 million level, historical data suggests a potential 30% drawdown from $94 to $62.
It’s important for readers to remember that this article does not contain investment advice or recommendations. Every investment and trading move involves risk, and individuals should conduct their own research before making any decisions.
Overall, traders are waiting to see how Litecoin’s halving event will impact its price and whether the additional scarcity effect will be enough to sustain the price above $90. However, there are concerns based on historical data from Litecoin’s previous open interest movements, indicating a potential sharp correction in the future. It remains crucial for investors to stay informed and conduct their own research to make well-informed decisions.