As the Litecoin halving approaches within a fortnight, traders are uncertain about whether the resulting increased scarcity will be sufficient to maintain LTC’s price above the $90 mark. The current price of Litecoin’s ticker, LTC, is $93.25, having experienced a 19% decline over the past 18 days. However, despite this recent drop, LTC has shown an overall positive performance of 31% for the year. A significant surge of 34% between June 29 and July 2 played a crucial role in driving the price to a 14-month high of $115.
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Nonetheless, an alarming statistic originating from the derivatives market suggests that a significant correction is likely to be underway.
The historical data does not support a favorable outlook for Litecoin bulls.
In the past, there have been three instances where Litecoin futures open interest dropped below $500 million, and each time, it resulted in price drops of 38% or more. This historical pattern potentially aligns with the current scenario.
Between June 29 and July 2, there was a significant surge in Litecoin futures’ aggregate open interest, rising from $300 million to $615 million. This surge indicates a heightened demand for leveraged futures contracts.
While on July 2, Litecoin’s price reached a 14-month high, it subsequently declined by 20% to $92. The concerning factor here is that Litecoin’s open interest has remained above the $500 million threshold. This suggests that buyers added margin to avoid liquidation, but it also indicates that the risk of a sharp correction still looms.
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Increased active contracts (open interest) typically have positive implications as they facilitate the participation of investors who require a specific market size. While this may not directly indicate bullish price momentum, it does enable larger price swings due to leverage and the possibility of liquidations when a trader’s position is closed due to insufficient margin.
Revisiting the crash in November 2021 and examining the open interest.
The decline in Litecoin’s open interest below the $500 million threshold appears to be a reliable indicator of reduced investor interest, and this observation is further supported by the three most recent occurrences, wherein the price experienced significant corrections in each instance.
On November 10, 2021, Litecoin’s open interest reached above $500 million, coinciding with a six-month price high of $289. Interestingly, within 24 days after the open interest fell below the $500 million mark on November 14, 2021, Litecoin’s price experienced a sharp crash of 48%.
![](https://sollcrypto.com/wp-content/uploads/2023/07/Screen-Shot-2023-07-22-at-10.49.25-PM.png)
In the past, there have been instances where Litecoin’s open interest surged but was unable to surpass the $500 million mark. Even a substantial 40% price gain to $232 in early September was not enough to break through that barrier.
Additionally, two other occurrences in 2021 between February and June further validate the importance of open interest. On both occasions, significant drawdowns in price followed after breaking the futures open interest threshold of $500 million.
Comparable events took place in both February 2021 and May 2021.
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On February 8, 2021, Litecoin’s open interest surged past the $500 million mark, coinciding with a notable 64% price gain that peaked at $247 on February 20, 2021. However, on the same day, the open interest dropped below $500 million, resulting in a significant 38% price decline in the following eight days. Interestingly, the psychological support level at $200 held for five days before the Litecoin price eventually declined to $142.
Similarly, on May 9, 2021, Litecoin’s open interest fell below $500 million after a 49-day period. During that time, it reached an all-time high of $409, but soon after, it experienced a sharp 71% correction in just 13 days, settling at $118.
While it is important to acknowledge that causation cannot be directly drawn from events that occurred over 19 months ago, it remains crucial to monitor Litecoin’s open interest closely. If it declines from the current level of $500 million, historical data suggests a potential 30% drawdown from $94 to $62.