On-chain data shows Bitcoin’s estimated leverage ratio has risen recently, a sign that a volatile move is coming for the asset.
Bitcoin’s Estimated Leverage Ratio Has Seen a Surge
As analysts in the CryptoQuant post pointed out, open interest has also increased a little in the last few hours. “Open interest” here is an indicator that measures the total number of contracts currently open in the Bitcoin futures market. Metric accounts for short and long contracts.
Another relevant metric is the “estimated leverage ratio,” which measures the ratio between open interest and the total amount of BTC currently on the derivatives exchange. This indicator tells you how much influence future market users have on average.
While the ratio has a high value, the average investor has taken a lot of leverage today. The trend shows users feeling brave and taking high risks. Historically, overleveraged markets generally follow price volatility.
On the other hand, a low value of the indicator indicates that the user does not use much influence at the moment. Naturally, market conditions like this involve low asset value volatility.
Now, here’s a chart showing the trend in Bitcoin’s estimated leverage ratio, as well as open interest, over the past 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 have been at high values at the beginning of the month. It was only with the fall in cryptocurrency prices that this overheated futures market calmed down.
As mentioned earlier, overleveraged markets tend to increase the risk of volatile movements in these assets. This plummets in price as this new example in action.
An overheated futures market will increase price volatility as liquidations become more common if more leverage is exerted by investors.
When a sudden price move occurs during overleveraged market conditions, an event called a “squeeze” can occur, where mass liquidation occurs at the same time that only more fuel causes the change to begin, thus causing more liquidation.
In the last few hours, Bitcoin’s estimated leverage ratio has risen again, indicating that investors are once again taking high risks. Open interest, however, only seems to rise a little.
This means that there are not many open positions in the market, but there are many users, but they have gained a lot of influence. Right now, it’s unclear whether the market is hot enough for a mass liquidation event. Still, it is possible that the coin could see some fresh volatility in the coming days.
BTC price
At the time of writing, Bitcoin is trading around $22,000, down 7% over the past week.
BTC continues to move sideways | Source: BTCUSD on TradingView
Featured images from Kanchanara on Unsplash.com, charts from TradingView.com, CryptoQuant.com