The Bitcoin leverage ratio reached an all-time high. This suggests that the market may be headed towards extreme volatility.
Bitcoin All Exchanges New Estimated Leverage Ratio
CryptoQuant pointed out in a post that the funding rate remained unchanged while market leverage increased.
The “all exchanges estimated leverage ratio” is an indicator that measures the ratio between the Bitcoin open interest and the derivative exchange reserve.
This measure shows how much leverage is currently used by BTC futures traders.
If this indicator’s value is very high, users may be taking too much leverage at the moment. This has historically led to greater volatility in crypto’s prices.
On the other hand, the value of the metric being low suggests investors aren’t taking high risk at the moment, as they haven’t used much leverage.
Here’s a chart showing the Bitcoin leverage ratio trend over the past few years.
It seems like the metric's value has been increasing over the past few months. Source: CryptoQuant| Source: CryptoQuant
You can see that Bitcoin’s estimated leverage ratio is on the rise and now has a new ATH. Investors are using a lot of leverage, on average.
This is because overleveraged market have been notoriously volatile.
As a result of sudden fluctuations in price, especially during periods of high leverage, many contracts could be liquidated. But it doesn’t end there; these liquidations further amplify the price move that created them, and hence cause even more liquidations.
Liquidations cascading together in such a way is called a “squeeze.” Such events can involve either longs or shorts.
We can get an indication of the direction that a potential squeeze might take by looking at Bitcoin funding rates, which is the periodic fee between short and long traders.
CryptoQuant points out that the metric currently has a neutral value, which means that there is an equal market split between longs and shorts. As such, it’s hard to say anything about the direction a possible squeeze in the near future might lean towards.
Although Bitcoin volatility is very low these weeks, due to the high amount of leverage it has accumulated, it could be only a matter time until a volatile price prevails.
At the time of writing, Bitcoin’s price floats around $19.6k, up 2% in the past week.
Source: BTCUSD at TradingView| Source: BTCUSD on TradingView
Featured Image from Kanchanara, Unsplash.com. Charts by TradingView.com. CryptoQuant.com.