Ethereum price crashes often follow ETH open interest peaks — Will history repeat?

Ether ( ETH ) gained 8.8% between Oct. 14 and Oct. 15, but the $2,650 resistance level proved more challenging than anticipated. Traders have become increasingly concerned that Ether's aggregate futures open interest reaching an all-time high  on Oct. 16 could be a warning flag. 

This surge in demand for leveraged ETH positions typically precedes severe price corrections. The aggregate Ether futures addressable market surpassed 5 million ETH for the first time ever on Oct. 15, representing a 12% increase from four weeks prior.

Ether futures open interest since 2020, ETH. Source: CoinGlass

On Aug. 2, the last time Ether's aggregate open interest peaked, ETH's price crashed 31.7% in less than four days, falling from $3,205 to $2,186. Will history repeat itself this time?

Higher demand for ETH futures is not necessarily bearish

Higher demand for ETH futures is not necessarily bearish, so the key insight from this data is whether system-wide leverage is expanding or contracting. The larger the bets, the greater the potential for sudden price movements due to forced liquidations .

Although derivatives markets may appear to be zero-sum games, their impact on spot prices is significant. This is primarily because futures contracts tend to trade at much higher volumes due to leverage. Additionally, whales and market makers rely on derivatives to quickly hedge exposures, a process that would be nearly impossible in spot markets due to lower available liquidity.

When forced liquidations of $50 million or more occur in futures markets, arbitrage desks immediately reduce risk on spot markets. This action further accelerates the price movement—whether upward or downward—creating an effect known as "cascading liquidations." This is precisely why traders monitor open interest to detect the risk of excessive leverage leading to unexpected price swings.

On Aug. 2, open interest peaked at 4.75 million ETH, marking a 15% increase compared to four weeks earlier. Essentially, the current market situation closely mirrors the structure from August. A total of $279 million in leveraged long positions were forcefully liquidated—a figure that excludes traders who used stop-loss orders or voluntarily closed their positions during that period.

Ether/USD 24-hour price. Source: TradingView

Other examples include April 1, when open interest topped 4 million ETH, up 21% over four weeks. In that case, Ether's price started at $3,648 and eventually bottomed at $2,604 on April 13, which was a 24% decline over twelve days. Therefore, there is sufficient historical evidence indicating that peak formations in Ether’s open interest typically precede strong price corrections.

Related: Bitcoin dominance hits 3.5-year high as altcoins get left behind

Bitcoin and broader market trends may set the tone for ETH price 

While post-fact analysis makes it easier to identify local tops in Ether's open interest charts, there is no way to predict whether this number will continue to grow and surpass 5.1 million ETH. The most recent instances of such peaks occurred while the broader cryptocurrency market was either trading sideways or experiencing short-term corrections, which adds another layer of complexity to the analysis.

Assuming the overall cryptocurrency market trend remains neutral, a 20% to 25% crash in Ether's price to around $1,960 is entirely within the realm of possibility, so traders should prepare accordingly for such a scenario. On the other hand, if Bitcoin ( BTC ) finally breaks above the $70,000 resistance level, the increased use of leverage in Ether could favor bullish momentum , potentially leading to price appreciation.

This article is for general information purposes and is not intended to be and should not be taken as legal or investment advice. The views, thoughts, and opinions expressed here are the author’s alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.