If a crucial historical trend for LTC futures occurs, the price of Litecoin could fall by 30%.
Litecoin's block subsidy will be slashed in half in less than two weeks, and traders are unsure if the increased scarcity impact will be sufficient to keep the LTC price over $90.
Although the price of Litecoin has dropped by 19% over the past 18 days, it has performed well this year, increasing by 31%. Notably, the price rose the most between June 29 and July 2, when it rose 34% and reached a 14-month high of $115.
However, a worrying number emerging from the options market suggests a significant correction is probably already under way.
The past doesn't support Litecoin bulls.
Price declines of 38% or more occurred in each of the past three times where Litecoin futures open interest fell below $500 million, which might be the case right now.
There was a large increase in aggregate open interest for litecoin futures from June 29 ($300 million) to July 2 ($615 million), indicating greater demand for leveraged futures contracts.
The price of Litecoin spiked on July 2 to a 14-month high before dropping 20% to $92 the next day. The fact that Litecoin's open interest is still above $500 million is worrying, though. This implies purchasers increased buffer to prevent liquidation but also the possibility of a sudden drop in price.
Positively, more active contracts (open interest) allow investors who need a certain market size to participate. Even though it may not always be positive for price momentum, leverage allows for wider price fluctuations and the possibility of liquidations when a trader's position is closed for lack of margin.
A review of the crash in November 2021 and current interest
The three most recent incidents of Litecoin's open interest falling below the $500 million mark seem to be a solid indicator of investors' waning interest, and the fact that its price saw significant corrections in each case supports the argument.
Litecoin's open interest had previously risen sharply but had not yet surpassed $500 million; even a 40% price increase to $232 in early September was unable to overcome this hurdle.
Two other occurrences in 2021 between February and June marked large drawdowns after crossing the futures open interest $500 million threshold, further demonstrating the impact of open interest.
The same things happened in May 2021 and February 2021
Open interest for Litecoin surpassed $500 million on February 8, 2021, representing a 64% price increase that peaked at $247 on February 20, 2021. Open interest, however, fell below $500 million that day, which resulted in a 38% price loss over the following eight days. Notably, the Litecoin price plummeted to $142 after holding steady at the $200 psychological price support for five days.
Once more, after 49 days, Litecoin's open interest dropped below $500 million on May 9, 2021. During that time, it rose to an all-time high of $409, then experienced a 71% decline in just 13 days, finishing at $118.
It's crucial to monitor Litecoin's open interest, even though causal conclusions cannot be inferred from events that occurred more than 19 months ago. History implies that if it drops from the current $500 million level, there might be a 30% fall from $94 to $62 in the future.