Bitcoin Leverage Ratio Plunges, Here’s What This Means
16 März 2023 - 8:38PM
NEWSBTC
On-chain data shows the Bitcoin estimated leverage ratio has taken
a plunge recently; here’s what this could mean for the market.
Bitcoin’s Estimated Leverage Ratio Has Sharply Declined Recently As
an analyst in a CryptoQuant post pointed out, the leverage has
dropped in the market despite the rally. The relevant indicator
here is the “estimated leverage ratio,” which measures the ratio
between the Bitcoin open interest and the total amount of BTC
stored in all derivative exchanges’ wallets. The “open interest”
refers to the total BTC margined futures contracts currently open
on all derivative exchanges. This metric accounts 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 the value of this metric is high, it means the average
contract holder is taking on high leverage currently. Such a trend
suggests that market participants are getting bold and willing to
take on a high risk. Generally, high leverage can cause the market
to become unstable. Thus, the price experiences high volatility
when these conditions form. On the other hand, low ratio values
imply users need to use more leverage currently. Naturally, the
price is usually calmer when this trend is observed. Now, here is a
chart that shows the trend in the Bitcoin estimated leverage ratio
over the last few years: Looks like the value of the metric has
sharply gone down in recent days | Source: CryptoQuant As displayed
in the above graph, the Bitcoin estimated leverage ratio had a
pretty high value when the rally started in January of this year
but has since been only going down. Related Reading: Bitcoin
Coinbase Premium Declines, But Still At Green Values, Bullish
Signal? There have been two significant plunges in the metric so
far; the first occurred just as the rally began. This sharp decline
was because the sudden sharp rally liquidated the high amount of
short contracts that had piled up during the bear market lows, thus
wiping out a lot of leverage. This event was an example of a
“liquidation squeeze.” During a squeeze, a sudden price move
triggers mass liquidations that only end up feeding said price to
move further, and thus, cause even more liquidations in the
process. When leverage piles up in the market, squeezes become more
probable. This is the reason why the market can get more volatile
when the leverage is at elevated levels. The chart shows that the
other plunge has come just during the last few days, where BTC has
witnessed a high degree of volatility, with the price fluctuating
wildly both up and down. Related Reading: Bitcoin (BTC) Dominance
Reclaims June 2022 Levels As Altcoins Plummet This trend of the
leverage ratio only going down with the rally is somewhat unusual.
Past rallies have generally accompanied the indicator following an
overall upwards trend because of investors FOMOing in and opening
up high-leverage positions. As for what this strange trend in the
metric may say about the current Bitcoin market, the quant thinks,
“latecomers who get greedy and use crazy leverages are not here
yet.” BTC Price At the time of writing, Bitcoin is trading around
$25,100, up 20% in the last week. BTC displays volatility | Source:
BTCUSD on TradingView Featured image from Maxim Hopman on
Unsplash.com, charts from TradingView.com, CryptoQuant.com
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