Polkadot crashed twice after futures openings hit $ 1 billion – will it happen again?

History shows that Polkadot both collapsed after the double open interest (OI) of futures hit the $ 1 billion mark. Should traders expect a correction now as open interest exceeds that number?

Whenever the number of derivative contracts (OI) currently in operation is tied to it, it usually means that more traders are involved.

In the futures market, longs and shorts are always in balance, but a larger number of active contracts allows the participation of institutional investors who require a minimal market size.

However, in the case of Polkadot (DOT), a price decline is usually predicted before the indicator breaks the $ 1 billion mark.

DOT. Price chart | Source: TradingView

The April 17th crash happened after DOT hit an all-time high (ATH) of $ 48.3, resulting in (OI) $ 1.2 billion in futures. Over the next week, it fell 45% to $ 26.6, bringing the number of active contracts down to $ 600 million.

A similar move occurred three weeks later, on May 15, when Polkadot again pegged a new ATH at $ 49.8. At about this time, a 68% crash persisted for the next five days. As a result, open interest hit a 4-month low of $ 220 million.

Polkadot. Futures OI summary | Source: Coinglass.com

Notice how Polkadot’s 28% rally hit a record high of $ 53.3 in the first two days of November and also pushed the derivatives indicator above the $ 1 billion mark.

The DOT 18.9 million development fund announced on Oct. 17 highlighted the rally ahead of the Parachain auctions scheduled for mid-November, according to Polkadot founder Gavin Wood, informing the growing ecosystem of the network.

Projects are currently raising capital to start their Parachain auctions, and Polkadot investors wishing to support either of them must lock their DOT on a sponsored account. In return, investors will be rewarded for parachain placement through airdropping tokens from the competing project.

What about the $ 54 billion question?

Does the “deadline” of US $ 1 billion for the open interest of Polkadot futures signal a possible crash or will it be different this time?

As explained earlier, Open Interest cannot be considered bullish or bearish on an independent basis. So, to understand whether derivatives traders are using excessive leverage, one should analyze data from perpetual futures contracts.

The instrument is the preferred derivative of retailers as its price tends to follow the regular spot market.

To offset their risk, the exchanges charge the party that needs more leverage a funding rate, and this fee is paid to the counterparty.

Financing rate 8 hours for perpetual futures on DOT in May | Source: Coinglass.com

Neutral markets tend to have funding rates between 0% and 0.03% or 0.6% per week, suggesting that long is the payer side. The average rate before the May 15 crash was slightly higher at 0.075% or 1.6% per week. At this point, the longs are not recklessly closing their positions and there is no sign of excessive leverage.

The only conclusion that can be drawn from this is that a general market crash has led ruthless investors and traders to sell DOT and therefore the derivatives market is not the main cause of the crash.

Another consolation for the owners is the current 8-hour subsidy rate from DOT of 0.05%. This is somewhat optimistic and is nowhere near what is considered to be worrying. There are currently no signs of a possible collapse as the futures open interest hits $ 1 billion.

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