On-chain data shows the Bitcoin estimated leverage ratio has shot up recently, suggesting that more volatility may be coming soon for the crypto.
Leverage In The Bitcoin Market Has Started Going Up Recently
As pointed out by an analyst in a CryptoQuant post, the cryptocurrency may face more volatility in the near future.
The “all exchanges estimated leverage ratio” is an indicator that’s defined as the open interest divided by the reserve of all derivatives exchanges. In simpler terms, what this metric tells us is the amount of leverage taken by users on average.
When the value of the ratio is high, it means users are taking on a lot of risk at the moment. An increasing amount of leverage can turn the market more volatile.
The reason for this is that a large amount of leverage implies a higher risk of liquidation. During any big price swings, a huge amount of liquidations can be triggered at once, cascading together and causing further price action.
Related Reading | Bitcoin Bearish Signal: Whale Ratio Continues To Stay At High Value
On the other hand, low values of the indicator suggest there isn’t much leverage in the market right now as users seek to avoid taking much risk.
Now, here is a chart that shows the trend in the Bitcoin estimated leverage ratio over the past year:
Looks like the value of the indicator has surged up recently | Source: CryptoQuant
As you can see in the above graph, the Bitcoin estimated leverage ratio has shot up in value over the past couple of weeks.
The metric reached its last high just before the LUNA and UST collapse. Afterwards, as the price crashed down, so did the indicator’s value due to a large amount of liquidations taking place.
Related Reading | Investors May Expect Downside For Bitcoin And Ethereum Market For The Next 3 Months
The quant in the post explains that this recent trend formation looks similar to back in December 2021. Then, the price observed a surge as the leverage ratio also recovered from the plunge.
The analyst believes a similar scenario can play out now as well. However, if the pattern truly follows, then any price rise that may follow will only be temporary as was the case back in December.
At the time of writing, Bitcoin’s price floats around $29.1k, down 4% in the last seven days. Over the past month, the crypto has lost 24% in value.
The below chart shows the trend in the price of the coin over the last five days.
It seems like the price of the coin has slumped down over the past few days | Source: BTCUSD on TradingView
Featured image from Unsplash.com, charts from TradingView.com, CryptoQuant.com