Bitcoin Leverage Ratio Shoots Up, More Volatility Ahead?

Keshav Verma

1 year ago

3 mins read

Reason to trust

Strict editorial policy that focuses on accuracy, relevance, and impartiality

Created by industry experts and meticulously reviewed

The highest standards in reporting and publishing

How Our News is Made

Strict editorial policy that focuses on accuracy, relevance, and impartiality

Ad discliamer

Morbi pretium leo et nisl aliquam mollis. Quisque arcu lorem, ultricies quis pellentesque nec, ullamcorper eu odio.

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.

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

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.

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.

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

Keshav Verma

Keshav is currently a senior writer at NewsBTC and has been attached to the website since June 14, 2021.

Keshav has been writing for many years, first as a hobbyist and later as a freelancer. He has experience working in a variety of niches, even fiction at one point, but the cryptocurrency industry has been the longest he has been attached to.

In terms of official educational qualifications, Keshav holds a bachelor’s degree in Physics from one of the premier institutes of India, the University of Delhi (DU). He started the degree with an aim of eventually making a career in Physics, but the onset of COVID led to a shift in plans. The virus meant that the college classes had to be delivered in the online-mode and with it came free time for him to explore other passions.

Initially only seeking to make some beer money, Keshav unexpectedly landed clients offering real projects, after which there was no looking back. Writing was something he had always enjoyed and to be able to do it for a living was like a dream come true.

Keshav completed his Physics degree in 2022 and has been focusing on his writing career since, but that doesn’t mean his passion for Physics has ended. He eventually plans to re-enter university to obtain a masters degree in the same field, but perhaps only to satiate his own interest rather than for using it as a means to find employment..

Keshav has found blockchain and its concepts fascinating ever since he started going down the rabbit-hole back in 2020. On-chain analysis in particular has been something he likes to research more about, which is why his NewsBTC pieces tend to involve it in some form.

Being of the science background, Keshav likes if concepts are clear and consistent, so he generally explains the indicators he talks about in a bit of detail so that the readers can perhaps come out having understood and learnt something new.

As for hobbies, Keshav is super into football, anime, and videogames. He enjoys football not only as a watcher, but also as a player. For games, Keshav generally tends towards enjoying singleplayer adventures, with EA FC (formerly FIFA) being the only online game he is active in. Though, perhaps due to being ultra-focused on the game, he is today a semi-pro on the EA FC scene, regularly participating in tournaments and sometimes even taking back prize money.

Because of his enthusiasm for anime and games, he also self-learned Japanese along the way to consume some of the untranslated gems out there. The skill didn’t merely remain as just a hobby, either, as he put it to productive use during his exploration for small-time gigs at the start of COVID, fulfilling a couple of Japanese-to-English translation jobs.

Keshav is also big into fitness, with agility and acceleration-related workouts making a big part of his program due to the relevance they have in football. On top of that, he also has a more traditional strength based program for the gym, which he does to maintain an overall fitness level of his body.

Disclaimer: The information found on NewsBTC is for educational purposes only. It does not represent the opinions of NewsBTC on whether to buy, sell or hold any investments and naturally investing carries risks. You are advised to conduct your own research before making any investment decisions. Use information provided on this website entirely at your own risk.