Bitcoin Leverage Ratio Rises, Volatile Move Incoming?

On-chain data shows the Bitcoin estimated leverage ratio has risen recently, a sign that a volatile move may be coming soon for the asset.

Bitcoin Estimated Leverage Ratio Has Observed A Surge

As an analyst in a CryptoQuant post pointed out, the open interest has also shown a small increase in the last few hours. The “open interest” here is an indicator that measures the total amount of contracts that are currently open on the Bitcoin futures market. The metric accounts for both short and long contracts.

Another relevant metric is the “estimated leverage ratio,” which measures the ratio between the open interest and the total amount of BTC currently sitting on derivative exchanges. This indicator tells us how much leverage future market users are taking on average.

When the ratio has a high value, the average investor has taken on a large amount of leverage right now. Such a trend suggests users feel bold and take on high risks. Historically, overleveraged markets have generally followed up with increased price volatility.

On the other hand, low indicator values imply users aren’t taking on that much leverage at the moment. Naturally, market conditions like these have involved low asset value volatility.

Now, here is a chart that displays the trend in the Bitcoin estimated leverage ratio, as well as the open interest, over the last couple of weeks:

Looks like only one of these metrics has observed any significant rise in recent days | Source: CryptoQuant

As shown in the above graph, the Bitcoin estimated leverage ratio and open interest had been at high values just earlier in the month. It was only with a sharp plunge in the price of the cryptocurrency that this overheated futures market calmed down.

As mentioned before, overleveraged markets tend to increase the risk of volatile moves in the asset. This plummets in the price was a recent example of this in action.

An overheated futures market would increase the price volatility because liquidations become more common the more leverage the investors take on.

When a sudden price move occurs during overleveraged market conditions, an event called a “squeeze” can occur, in which mass liquidations occur at once that only further fuel the price move that caused them to begin with, thus causing even more liquidations.

In the last few hours, the Bitcoin estimated leverage ratio has again risen, suggesting that investors are again taking on high risk. The open interest, however, has only seen a slight rise.

This means there aren’t too many positions open in the market, but however many users there are, nonetheless, have taken on a high amount of leverage. Currently, it’s unclear whether the market is overheated enough for a mass liquidation event yet. Still, the chances are that the coin may see some fresh volatility in the coming days.

BTC Price

At the time of writing, Bitcoin is trading around $22,000, down 7% in the last week.

BTC continues to move sideways | Source: BTCUSD on TradingView

Featured image from Kanchanara on Unsplash.com, charts from TradingView.com, CryptoQuant.com