On-chain data shows that the Bitcoin futures market has remained hot recently as the leverage taken on by investors has been quite high.
Bitcoin’s Estimated Leverage Ratio Decreases Slightly, But Still Very High
Following the surge in derivative activities, leverage in the market hit a new all-time high recently, as noted by an analyst in a CryptoQuant post.
The “estimated leverage ratio of all exchanges” is an indicator that is defined as the ratio of open interest to derivatives exchange reserve.
When the value of this metric is high, it means that the average investor is currently using a large amount of leverage on the trades. Such a trend suggests that holders are willing to take on high risk today.
On the other hand, the low values of the indicator imply that the holders are opting for a low-risk approach at the moment, since they are not using much leverage.
Now, here is a chart showing the trend in the estimated leverage ratio of all Bitcoin exchanges over the last two years:
The value of the metric seems to have risen rapidly in recent weeks | Source: CryptoQuant
As you can see from the chart above, Bitcoin’s estimated leverage ratio had risen in recent weeks and reached a new high a while ago.
However, since then the value of the indicator has dropped somewhat. This decline was instigated by the recent temporary surge in market volatility due to the CPI release, which wiped out a large amount of leverage.
Nonetheless, the value of the indicator has remained quite high despite the drop, which means that there is still a lot of leverage in the market.
Historically, overleveraged markets have generally ended in very sharp price moves, as liquidations tend to occur quite easily in such environments.
Such sell-offs amplify the price movement that caused them, leading to more sell-offs. This event where the liquidations cascade together is called a squeeze.
Since leverage is so high in the Bitcoin futures market right now, a squeeze is likely to occur and BTC price breaks out of the range.
As for which direction the squeeze could go, the quant comments: “With retail traders overly bullish compared to institutional traders, the risk-reward ratio does not look good for bulls.”
At the time of writing, the price of Bitcoin is hovering around $19,100, down 2% over the past seven days.
It seems that the value of crypto has stalled once again after the volatility of the IPC | Source: BTCUSD on TradingView Kanchanara Featured Image on Unsplash.com, Charts from TradingView.com, CryptoQuant.com
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