Bitcoin Leverage Ratio Rises, Volatile Move Incoming?
On-chain data shows that Bitcoin’s estimated leverage ratio has increased recently, a sign that a volatile move may be coming soon for the asset.
Bitcoin’s Estimated Leverage Ratio Observed an Increase
As an analyst pointed out in a CryptoQuant post, open interest has also shown a slight increase in the past few hours. “Open interest” here is an indicator that measures the total amount of contracts that are currently open in the Bitcoin futures market. The metric accounts for both short and long contracts.
Another relevant metric is the “estimated leverage ratio,” which measures the relationship between open interest and the total amount of BTC currently on derivatives exchanges. This indicator tells us how much leverage future market users are getting on average.
When the index has a high value, the average investor has taken on a large amount of leverage at the moment. Such a trend suggests that users feel bold and take high risks. Historically, overleveraged markets have generally been accompanied by increased price volatility.
On the other hand, low indicator values indicate that users are not assuming as much influence at the moment. Naturally, market conditions like these involve low volatility in asset values.
Now, here’s a graph that shows the trend in Bitcoin’s estimated leverage ratio, as well as open interest, over the last few weeks:
Looks like only one of these metrics has observed any significant rise in recent days | Source: CryptoQuant
As shown in the chart above, Bitcoin’s estimated leverage ratio and open interest were at high values at the beginning of the month. It was only with a sharp drop in the cryptocurrency price that this overheated futures market calmed down.
As mentioned earlier, overleveraged markets tend to increase the risk of volatile asset movements. This drop in price was a recent example of this in action.
An overheated futures market would increase price volatility because sell-offs become more common the more leverage investors take on.
When a sudden price movement occurs during overleveraged market conditions, an event called “squeezing” can occur, in which mass liquidations occur all at once, which only further fuel the price movement that caused them, causing even more liquidations. .
In the last few hours, Bitcoin’s estimated leverage ratio has risen again, suggesting that investors are once again taking on high risk. Open interest, however, saw only a slight increase.
This means that there are not many open positions on the market, but nevertheless, many users have taken on a large amount of leverage. It is currently unclear whether the market is overheated enough for a mass sell-off event. Still, chances are the coin will see some new volatility in the coming days.
BTC price
At the time of writing, Bitcoin is trading around $22,000, down 7% over the last week.
BTC continues to move sideways | Source: BTCUSD on TradingView
Featured Image of Kanchanara from Unsplash.com, Charts from TradingView.com, CryptoQuant.com