Cardano (ADA) Futures Open Interest Surpasses US$2-Billion: Will the ADA Price Crash Now?

At press time, the price of Cardano (ADA) is hovering around US$2.18, reaching an all-time-high (ATH). In the last 24-hour, 7-days, 30-days, and 2021 YTD (Year-to-Date), the price of Cardano against the US Dollar has increased by 16.50%, 33.61%, 46.66%, and 1,114.85% respectively. This phenomenal performance has catapulted the market capitalization to US$68 billion currently.

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ADA’s derivatives market is also evolving fast. The futures open interest has been nearing US$1 billion. This has posed an opportunity as well as a threat to the spot price of Cardano. This is because the price of ADA crashed the last time when the futures open interest reached US$1 billion.

The leading crypto traders have started to question whether the past will repeat itself. In fact, some cautious investors have already started to question whether the US$200 billion in potential liquidations are around the corner. They have started to draw similarities with the 23% crash that took place on April 17.

The rally in smart contract-focused cryptocurrencies is mainly taking place because of decentralized finance (DeFi). It is true that a proof-of-stake mechanism is used by Cardano network. However, it will start supporting smart contracts as well as native token issuance after the pending "Goguen" update. ADA coins are inflationary in nature. Its supply currently is 32 billion. However, its supply is capped at 45 billion coins.

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At one point in time on May 13, the open interest on futures contracts reached US$940 million. This open interest is particularly impressive considering that the futures volumes of Cardano (ADA) hardly cross above the US$4 billion marks.

On April 17, US$195-million long contracts liquidation took place. It was partially responsible for the 23% crash, which happened over a span of 4-hours. However, it must be reiterated currently that a significantly large open interest can’t be pinpointed as the major reason behind cascading liquidations.

Open interest measures the number of futures contracts that are open. However, these are matched at all times between longs and shorts. It must be kept in mind that aggressive liquidations take place only when buyers are using excessive leverage in their long positions. It can be measured only with the help of the funding rate.

When buyers use higher leverage, the fees or funding rate also increases. This leads to the drainage of their accounts slowly but steadily. In the case of a retail buying frenzy, this fee can go up to 5.5% per week.

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From historical charts, it can be seen that just before the April 17 crash, the leverage of the buyers was at a very high level. At that time, it was a 6.5% funding rate on a weekly basis (meaning that the funding rate at every 8-hours was 0.30%). When it comes to carrying long positions, such a high rate is a burden. When funding rates are unusually high, much above the 5.5% level, then it’ll not take much time to trigger stop orders. That’s exactly what happened on April 17 in the case of Bitcoin (BTC), which dragged down the entire crypto market with it.

Currently, on most cryptocurrency exchanges, the funding rate is near zero rate. This indicates that there is a balanced use of leverage on both the buy-side and the sell-side. Therefore, it can be inferred that even if the derivatives’ open interest surges, there is no sign of a crash in the spot price of Cardano (ADA). In fact, at press time the total open interest of Cardano derivatives has also come down to just US$652.80 from the near-1-billion level.

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