According to on-chain data, the Bitcoin futures markets have remained hot lately due to high levels of leverage by investors.
Although the Bitcoin estimated leverage ratio has fallen a bit, it remains very high.
A CryptoQuant analyst noted that the market’s leverage reached a new high following the increase in derivative activity.
The “all exchanges estimated leverage ratio” is an indicator that’s defined as the ratio between the open interest and the derivative exchange reserve.
If this value is high it indicates that the average investor uses a lot of leverage when trading on the exchanges. This suggests that holders are prepared to take on high levels of risk.
On the other hand, low values of the indicator imply holders are going for a low-risk approach at the moment as they aren’t using much leverage.
Here’s a chart showing the Bitcoin exchanges average leverage ratio for the past two years.
Source: CryptoQuant| Source: CryptoQuant
You can see that Bitcoin’s estimated leverage ratio was increasing over the past few weeks. It reached an all-time high a short time ago.
However, since then the indicator’s value has come down a bit. This was due to the CPI Release, which caused a temporary surge of volatility that caused a lot of leverage.
Nonetheless, the indicator’s value has remained pretty high despite the decline, meaning there is still plenty of leverage to go around in the market.
Overleveraged markets typically end in sharp price swings. In such situations, liquidations are quite common.
These liquidations can increase the volatility of prices, which in turn leads to more liquidations. A squeeze is an event in which liquidations are stacked together.
Since leverage is so high in the Bitcoin futures market right now, a squeeze could likely take place and break BTC’s price out of the range.
As for which direction the squeeze might go in, the quant comments: “With retail traders overly bullish compared to institutional traders, the risk-reward does not look good for the bulls.”
At the time of writing, Bitcoin’s price floats around $19.1k, down 2% in the last seven days.
Source: BTCUSD on TradingView| Source: BTCUSD on TradingView
Featured Image from Kanchanara, Unsplash.com. Charts by TradingView.com. CryptoQuant.com.