Bitcoin Leverage Ratio Hits New ATH, Market In For A Rough Ride?
On-chain data shows that the Bitcoin leverage ratio has increased to a new all-time high, suggesting that the market may be headed for high volatility.
Bitcoin All Exchanges Estimated Utilization Rate Sets New ATH
As pointed out by a CryptoQuant post, the funding rate has remained neutral while leverage has increased in the market.
“All Exchanges’ Estimated Leverage Ratio” is an indicator that measures the relationship between Bitcoin’s open interest and the derivative exchange reserve.
What this calculation tells us is the average amount of leverage used by investors in the BTC futures market.
When the value of this indicator is high, it means that users are taking a lot of influence right now. Historically, such values have led to higher volatility in the price of the crypto.
On the other hand, the value of the calculation being low suggests that investors are not taking high risk at the moment, since they have not used much leverage.
Now, here is a chart showing the trend of the Bitcoin leverage ratio over the past few years:
Looks like the value of the metric has been rising up during the last few months | Source: CryptoQuant
As you can see in the graph above, Bitcoin’s estimated leverage ratio has shot up recently and has made a new ATH. This means that investors take a high amount of leverage on average.
The reason why markets with surpluses have usually become very volatile in the past lies in the fact that such conditions make mass liquidations more likely.
Any sudden fluctuations in the price during periods of high leverage can lead to many contracts being liquidated at once. But it doesn’t end there; these liquidations further amplify the price movement that created them, thereby causing even more liquidations.
Liquidations that coincide in such a way are called a “squeeze”. Such events may involve either longs or shorts.
Bitcoin funding rates (the periodic fee exchanged between long and short traders) can give us an idea of the direction a potential squeeze might go.
CryptoQuant notes that this metric currently has a neutral value, suggesting that the market is equally split between shorts and longs. As such, it is difficult to say anything about the direction a potential squeeze in the near future might lean towards.
Bitcoin volatility has actually been very low in recent weeks, but with such a high accumulation of leverage, it may be a matter of time before a volatile price takes over.
BTC price
At the time of writing, Bitcoin’s price is hovering around $19.6k, up 2% in the last week.
The BTC value continues to trend sideways | Source: BTCUSD on TradingView
Featured image from Kanchanara on Unsplash.com, charts from TradingView.com, CryptoQuant.com
