On-chain data shows the Bitcoin estimated leverage ratio has continued to hit new highs recently, a sign that could be bearish for the price of the crypto.
Bitcoin Estimated Leverage Ratio Continues To Set New Highs
As pointed out by an analyst in a CryptoQuant post, the BTC leverage ratio has been moving up since a while now.
The “estimated leverage ratio” is an indicator that tells us how much leverage is used by Bitcoin users on average.
The metric’s value is calculated by taking the ratio between the open interest and the reserve. The former is the total amount of derivatives contracts open on exchanges, while the latter is the number of coins stored in derivatives exchange wallets.
When the value of the ratio increases, it means holders are now taking on more risk as they make use of a higher amount of leverage.
Such a trend can lead to higher volatility in the price of Bitcoin as liquidation risk increases with increasing leverage.
On the other hand, low values of the ratio imply there isn’t much leverage in the market right now as users aren’t taking on much risk.
Now, here is a chart that shows the trend in the BTC estimated leverage ratio over the past year:
The value of the metric seems to have been going up recently | Source: CryptoQuant
As you can see in the above graph, the Bitcoin leverage ratio has been rising since a while now, and is continuing to set new highs. This means that users are taking on a lot of risk right now.
At the same time, the exchange reserve has plummeted down, which is usually a bullish sign for the price of the coin.
Related Reading | Bitcoin 2022 Miami: Renaissance Art Gallery Puts Rarity On Display
However, the extremely high leverage in the market at the moment could be quite dangerous for the crypto’s outcome as high values of the metric have often resulted in sharp corrections in the past.
It now remains to be seen whether the ratio’s value will come down in a sharp blow down or if it will go down in steps, affecting the price in rather short bursts.
At the time of writing, Bitcoin’s price floats around $40.6k, down 13% in the last seven days. Over the past month, the crypto has gained 4% in value.
The below chart shows the trend in the price of the coin over the last five days.
Looks like the price of the coin has plummeted down over the last couple of days | Source: BTCUSD on TradingView
Featured image from Unsplash.com, charts from TradingView.com, CryptoQuant.com