On-chain data shows that bitcoin’s perceived leverage ratio has declined recently; Here’s what this could mean for the market.
Bitcoin’s Predicted Leverage Ratio Has Dropped Sharply Recently
As an analyst at CryptoQuant Post Told, despite the rally, the leverage in the market has dropped. The relevant metric here is the “estimated leverage ratio,” which measures the ratio between bitcoin open interest and the total amount of BTC stored in the wallets of all derivatives exchanges.
“Open Interest” refers to the total BTC margined futures contracts currently open on all derivatives exchanges. This metric is for both short and long contracts.
The Estimated Leverage Ratio tells us the average amount of leverage used by futures market users right now. When this metric has a high value, it means that the average contract holder is currently carrying high leverage.
Such trends suggest that market participants are getting bolder and are willing to take higher risks. Generally, the market can be volatile due to high leverage. Thus, higher volatility is experienced in price when these conditions are created.
On the other hand, lower ratio values mean that users currently need to use more leverage. Naturally, when this trend is observed the price usually calms down.
Now, here’s a chart that shows the trend in bitcoin’s estimated leverage ratio over the years:
Looks like the value of the metric has sharply gone down in recent days | Source: CryptoQuant
As shown in the graph above, when the rally began in January this year, the bitcoin predicted leverage ratio was very high, but it has only been going down since then.
There have been two significant drops in the metric so far; The first incident happened as soon as the rally started. This sharp drop was because the sudden sharp rally liquidated the high volume of short contracts that had piled up during the bottom of the bear market, thus wiping out much of the leverage.
This event was an example of a “liquidation squeeze”. During a squeeze, sudden price changes trigger massive liquidations that only feed said price to move further, and thus, cause even more liquidations in the process.
When leverage piles up in the market, the potential for contraction increases. This is why the market can be more volatile when leverage is at a higher level.
The chart shows that other declines have occurred only during the past few days, where BTC has seen a high level of volatility, with both swinging wildly in price.
This trend of leverage ratio going down only with the rally is somewhat unusual. Past rallies have typically followed an overall upward trend with the indicator as investors FOMOing and opening high-leverage positions.
As for what this strange trend in the metric might say about the current bitcoin market, Quant thinks, “The latecomers who get greedy and use insane leverage are not here yet.”
At the time of writing, bitcoin is trading around $25,100, up 20% over the past week.
BTC displays volatility | Source: BTCUSD on TradingView
Credit : www.newsbtc.com