Bitcoin Leverage Ratio Hits New ATH, Market In For A Rough Ride?
October 07 2022 - 3:00PM
NEWSBTC
On-chain data shows the Bitcoin leverage ratio has surged up to a
new all-time high, suggesting the market could be heading towards
high volatility. Bitcoin All Exchanges Estimated Leverage Ratio
Sets New ATH As pointed out by a CryptoQuant post, the funding rate
has remained neutral while the leverage has increased in the
market. The “all exchanges estimated leverage ratio” is an
indicator that measures the ratio between the Bitcoin open interest
and the derivative exchange reserve. What this metric tells us is
the average amount of leverage currently being used by investors in
the BTC futures market. When the value of this indicator is high,
it means users are taking a lot of leverage right now.
Historically, such values have led to higher volatility in the
price of the crypto. Related Reading: Bitcoin Cash Price: Investors
Must Avoid These Levels To Prevent Losses On the other hand, the
value of the metric being low suggests investors aren’t taking high
risk at the moment, as they haven’t used much leverage. Now, here
is a chart that shows the trend in the Bitcoin leverage ratio over
the last 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 above graph, the Bitcoin estimated leverage ratio
has shot up recently and has attained a new ATH. This means that
investors are taking a high amount of leverage on average. The
reason overleveraged markets have usually turned highly volatile in
the past lies in the fact that such conditions lead to mass
liquidations becoming more probable. Related Reading: Bitcoin
Struggles To Retain The $20,000 Mark While ENS Protocol Gains Any
sudden swings in the price during periods of high leverage can lead
to a lot of contracts getting liquidated at once. But it doesn’t
end there; these liquidations further amplify the price move that
created them, and hence cause even more liquidations. Liquidations
cascading together in such a way is called a “squeeze.” Such events
can involve either longs or shorts. The Bitcoin funding rates (the
periodic fee exchanged between long and short traders) can give us
an idea about which direction a possible squeeze may go in.
CryptoQuant notes that this metric has a neutral value currently,
implying the market is equally divided between shorts and longs. As
such, it’s hard to say anything about the direction a possible
squeeze in the near future might lean towards. The Bitcoin
volatility has in fact been very low in recent weeks, but with such
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 floats around $19.6k, up 2% in the past 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
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