Bitcoin Futures Market Continues to Overheat as Leverage Remains High

On-chain data shows that the bitcoin futures market has been hot lately due to the extremely high leverage by investors.

Bitcoin’s Estimated Leverage Ratio Drops A Little, But Still Remains Very High

As analysts noted in a CryptoQuant post, leverage in the market recently hit a new high following an increase in derivatives activity.

“All Exchanges Estimated Leverage Ratio” is a metric defined as the ratio of open interest to derivatives exchange reserves.

A high value for this indicator means that the average investor is currently using a large amount of leverage on the exchange. Such trends suggest that holders are willing to take higher risks at this time.

On the other hand, a low indicator value means that the holder is not using much leverage at the moment and is therefore taking a low-risk approach.

Well, here’s a chart that shows the trend in estimated leverage ratios for all Bitcoin exchanges over the past few years.

The value of the metric seems to have rapidly risen during the last few weeks | Source: CryptoQuant

As you can see from the graph above, Bitcoin’s estimated leverage ratio has been on the rise for the past few weeks, hitting an all-time high just a short time ago.

However, since then the indicator values ​​have gone down a bit. The decline was caused by a recent spike in market volatility due to his CPI release, which washed away a large amount of leverage.

Nonetheless, the indicator’s value remains fairly high despite the drop, and the market still has plenty of leverage.

Historically, overleveraged markets have typically ended with very sharp price movements. Because liquidation tends to occur very easily in such an environment.

Such liquidations amplify the price movements that caused them, leading to even more liquidations. This event of liquidation cascading is called a squeeze.

The bitcoin futures market is currently so highly leveraged that it is possible that a squeeze will occur and the price of BTC will fall out of range.

Commenting on which direction Squeeze will go, Quants said:

BTC price

At the time of writing, Bitcoin’s price is hovering around $19.1 thousand, down 2% over the last 7 days.

Looks like the value of the crypto has once again gone stagnant after the CPI volatility | Source: BTCUSD on TradingView

Featured image from Kanchanara on Unsplash.com, charts from TradingView.com, CryptoQuant.com