Open interest, and what it tells you that volume does not

Open interest is the total size of positions that are still open, counted once rather than twice. Every perp position has a long on one side and a short on the other, so a contract is one unit of open interest, not two. Two traders opening a new position against each other add to it. Two traders closing against each other remove from it. A trader handing a position to someone else who is opening leaves it exactly where it was, which is why a heavy trading day can end with open interest unchanged.

Volume is a flow. It accumulates over a window and resets when the window does, so it tells you how much activity happened, not how much exposure survived it. Open interest is a level. It is a snapshot of positioning at an instant, and it only moves when positions are created or destroyed. A billion dollars of volume against flat open interest is intraday churn: the same risk being passed around. The same volume against a sharp rise in open interest is new money committing.

The pair of directions is more informative than either one alone. Price up with open interest up means new longs are being opened into strength, which is positioning being added rather than unwound. Price up with open interest falling is short covering: the move is being driven by traders leaving, and it tends to stop when they have finished. Price down with open interest up means new shorts. Price down with open interest collapsing is forced closing, which is what a liquidation cascade looks like in the data.

The level alone means little. What matters is the level relative to what could absorb it.

• Open interest against the depth of the book: a large position set standing on a thin book unwinds badly
• Open interest against spot volume in the same asset: derivatives far larger than the underlying market is a fragile structure
• Open interest alongside funding: high open interest with high positive funding is a crowded, paying long side
• A vertical drop in open interest over minutes: positions were closed for their owners, not by them

Open interest is per venue. Each one publishes its own, some in contracts and some in dollar notional, and the two are not interchangeable. Dollar open interest moves with the price even when nobody trades: five hundred million dollars of BTC open interest at a price of one hundred thousand becomes five hundred and twenty million after a four percent rally with not one new position opened. If you are trying to see whether positioning changed, compare in coin units. If you are trying to see how much money is at risk, the dollar figure is the one you want.

Open interest has no direction. It counts contracts, and every contract has a long and a short, so it is never bullish or bearish by itself. It also says nothing about who holds the risk: a large figure built from hedged market makers and a large figure built from retail longs at high leverage look identical in the number and behave nothing alike under stress. Funding, liquidation data and the distribution of leverage are what fill that gap in.