Bitcoin Leverage Rises, Volatile Move Incoming?
On-chain data shows that Bitcoin’s estimated leverage ratio has increased recently, a sign that a volatile move could soon be coming for the asset.
Bitcoin’s estimated utilization rate has observed an increase
As an analyst in a CryptoQuant post pointed out, open interest has also shown a slight increase in recent hours. The “open interest” here is an indicator that measures the total number of contracts currently open on the Bitcoin futures market. The metric stands for both short and long contracts.
Another relevant metric is the “estimated leverage ratio”, which measures the ratio of the open interest to the total amount of BTC currently sitting on derivatives exchanges. This indicator tells us how much influence future market users take on average.
When the ratio has a high value, the average investor has taken on a large amount of leverage right now. Such a trend suggests that users feel brave and take high risks. Historically, bullish markets have generally followed up with increased price volatility.
On the other hand, low indicator values suggest that users are not taking much influence at the moment. Naturally, market conditions such as these have involved low volatility in asset value.
Now, here’s a chart showing the trend in Bitcoin’s estimated leverage ratio, as well as the open interest, over the past couple of weeks:
Looks like only one of these metrics has observed any significant rise in recent days | Source: CryptoQuant
As shown in the graph above, Bitcoin’s estimated leverage ratio and open interest had been at highs just earlier in the month. It was only with a sharp fall in the price of the cryptocurrency that this overheated futures market calmed down.
As mentioned before, bullish markets tend to increase the risk of volatile movements in the asset. This plunge in price was a recent example of this in action.
An overheated futures market will increase price volatility because liquidations become more common the more leverage investors take on.
When a sudden price movement occurs under legacy market conditions, an event called a “squeeze” can occur, where mass liquidations occur all at once that only further accelerate the price movement that caused them to begin with, thus causing even more liquidations.
Over the past few hours, Bitcoin’s estimated leverage ratio has again increased, suggesting that investors are once again taking high risk. However, open interest has only seen a slight increase.
This means that there are not too many positions open in the market, but no matter how many users there are, they have still taken on a high leverage. For now, it is unclear whether the market is overheated enough for a mass liquidation event yet. Nevertheless, there is a high chance that the coin may see some new volatility in the coming days.
BTC price
At the time of writing, Bitcoin is trading around $22,000, down 7% in the last week.
BTC continues to move sideways | Source: BTCUSD on TradingView
Featured Image by Kanchanara at Unsplash.com, Charts by TradingView.com, CryptoQuant.com
