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Bitcoin

Bitcoin Leverage Ratio Shoots Up, More Volatility Ahead?

Hououin Kyouma by Hououin Kyouma
2 months ago
in Bitcoin
Reading Time: 3 mins read

On-chain data shows the Bitcoin leverage ratio has shot up with the rise above the $30,000 mark, something that may cause more volatility for the coin.

Bitcoin Estimated Leverage Ratio Has Sharply Surged Recently

As pointed out by an analyst in a CryptoQuant post, market participants have responded to the price surge by opening high-leverage positions. The “estimated leverage ratio” is an indicator that measures the ratio between the Bitcoin open interest and derivative exchange reserve.

Here, the former is a metric that measures the total amount of positions that investors have opened on the futures market, while the latter tells us about the supply sitting in the wallets of all derivative exchanges.

When the leverage ratio has a high value, it means the average futures contract holder is taking on a high amount of leverage, implying that users are willing to take on high risk right now. Generally, such market conditions lead to the price of the cryptocurrency turning more volatile.

On the other hand, low values of the metric suggest the holders aren’t willing to take on much leverage currently. Naturally, the BTC value can become more stable while this kind of trend lasts.

Related Reading: Bitcoin Price Prediction: BTC Soars to 10-Month Highs – Where is the Resistance Toward $40K?

Now, here is a chart that shows the trend in the Bitcoin estimated leverage ratio over the last few weeks:

Bitcoin Estimated Leverage Ratio

The value of the metric seems to have been quite high in recent days | Source: CryptoQuant

As shown in the above graph, the Bitcoin estimated leverage ratio has rapidly risen in the last couple of days as the price of the cryptocurrency has broken above the $30,000 mark for the first time in about 10 months. This means that investors have started to open positions on the futures market with a high amount of average leverage.

When leverage is high in the market, a large number of liquidations can take place at once if a sharp enough swing in the price takes place. Such mass liquidations generally only end up fueling the price move that caused them further, thus leading to even more liquidations in the process.

When liquidations cascade together in this fashion, the event is termed a “liquidation squeeze.” This type of occurrence is the reason why markets with high leverage can turn quite volatile.

Since the leverage ratio has shot up recently, a squeeze may now be more probable to take place in the near future. Any volatility that may result from this, however, can go either way.

Related Reading: Bitcoin Market Shows Signs Of Euphoria, Will $30,000 Be Lost?

But considering that the indicator’s value has risen with the price, it’s possible that a lot of long positions have amassed in the market, implying that a long squeeze may be more likely. If such a squeeze does take place, the price would take a bearish hit.

BTC Price

At the time of writing, Bitcoin is trading around $30,000, up 5% in the last week.

Bitcoin Price Chart

Looks like the value of BTC has sharply gone up over the last two days | Source: BTCUSD on TradingView
Featured image from Jievani Weerasinghe on Unsplash.com, charts from TradingView.com, CryptoQuant.com
Tags: bitcoinBitcoin Leverage RatioBitcoin volatilitybtcbtcusd
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Hououin Kyouma

Hououin Kyouma

Kyouma is currently a senior writer at NewsBTC and has been attached to the website since June 14, 2021. Kyouma has been writing for many years, first as a hobbyist and later as a freelancer. He obtained a bachelor's in physics in 2022 and is planning on starting a master's in the same field in the near future. Kyouma is enthusiastic about the cryptocurrency industry and holds an active interest in on-chain analysis. His hobbies include gaming, anime, and football. You can find Kyouma on Twitter at @Kyouma29.

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