Bitcoin Second Bull Run Looms as BTC Futures Market Becomes Overleveraged

A recent analysis suggests Bitcoin may be gearing up for the second bull run as the futures market becomes overleveraged.

Ki Young Ju, the CEO of CryptoQuant, recently provided data that indicates overleveraging in the Bitcoin-Tether (BTC-USDT) futures market, which could be a precursor for massive price movements.

Notably, his report assessed data from two important metrics: the BTC-USDT open interest to reserves ratio and the BTC-USDT open interest to USDT market cap ratio.

Bitcoin OI to Reserves Ratio

The first metric, the Open Interest to Reserves ratio, highlights how much open interest (unsettled futures contracts) exists relative to the amount of Tether (USDT) held in reserves by major exchanges. Notably, OI on exchanges recently reached an ATH above $19 billion.

The ratio, which includes Ethereum- and Tron-based USDT, covers 97% of the total USDT market cap, making it highly representative of the overall market. A steady increase in this metric suggests growing leverage in the market.

On July 29, the ratio had surged to 0.42, when Bitcoin’s price hit $70,016, as its recovery led to an uptick in BTC price. However, following the July 29 peak, it dropped alongside Bitcoin’s price, hitting a low of 0.27 in early August. 

Interestingly, this drop coincided with Bitcoin’s price falling to a six-month low of $49,577. This marked the end of a retracement phase. Since then, the metric has gradually recovered and now stands at 0.46. This recent recovery suggests increasing leverage as traders bet on a further rise in Bitcoin’s price.

BTCUSDT OI to USDT Cap Ratio

The second metric is the ratio of total BTC-USDT open interest to USDT’s market cap. This measure also reflects the level of leverage in the market and has closely tracked Bitcoin’s price movements throughout 2024. 

At the start of the year, this metric was at a low of 0.06, but it spiked to 0.12 in March, aligning with Bitcoin’s all-time high of over $73,000. Since the March peak, the ratio has fluctuated with Bitcoin’s price, reaching a low of 0.07 in early August when the price dropped to $49,577. 

However, it has since returned to 0.12, demonstrating a recovery in market sentiment. The rise of these two metrics suggests that Bitcoin could be on the verge of another bullish surge.

Notably, Ki Young Ju confirmed that a factor driving this overleveraging is the relatively low Maximum Drawdown (MDD) in this market cycle. 

Bitcoin On a Recovery Path

With less severe price drops, even traders using 3x leverage positions have avoided liquidation, encouraging more aggressive use of leverage. As a result, many traders are now heavily leveraged. This in turn sets up the market for a potential sharp move.

The ratio of total $BTC-USDT open interest to $USDT market cap tells the same story.

In this cycle, the low MDD seems to let even those with 3x leverage survive, which is why many are heavily leveraged, imo🤔 pic.twitter.com/8LbzmFFdFG

— Ki Young Ju (@ki_young_ju) October 17, 2024

Meanwhile, Bitcoin price has recently seen a resurgence, climbing by nearly 5% within two days earlier in the month and maintaining gains despite slight pullbacks. 

After breaching the $63,000 level, it continued its uptrend, recently reaching $67,000. However, the support at this level is weak, and if a correction occurs, bulls must defend the $66,119 pivot to prevent a drop into bearish territory.