Rising Leverage in Bitcoin Market Signals Increased Risk Appetite

Rising Leverage in the Bitcoin Market Signals Increased Risk Appetite

Leverage in the Bitcoin (BTC) market is on the rise once again, indicating that traders are willing to take on more risk, which could lead to heightened volatility. The estimated leverage ratio, a metric that divides global futures open interest by the number of Bitcoin held on exchanges, has surged to 0.2060. This marks the highest level recorded since October 2023, according to data from the analytics firm CryptoQuant.

This uptick in leverage follows a prolonged period of consolidation below the 0.20 mark, suggesting that traders are increasingly utilizing borrowed capital to amplify their futures positions. This shift points to a more risk-on environment, as lower ratios typically reflect a more cautious trading approach.

The estimated leverage ratio had reached its peak after the dramatic collapse of Sam Bankman-Fried’s FTX exchange, which was once the third-largest futures trading platform in late 2022. Since then, the ratio has trended downward until December 2023.

Leverage empowers traders to manage larger positions with relatively small amounts of capital, which can magnify both gains and losses. However, it is a double-edged sword that can expose traders to margin calls and forced liquidations if market movements are unfavorable, thus contributing to price volatility.

“The recent increase in the Bitcoin Estimated Leverage Ratio indicates a growing trend among investors towards utilizing higher leverage in the derivatives market,” noted CryptoQuant in a recent blog post.

$58,500: A Crucial Price Level

As highlighted by Hyblock Capital, a significant amount of high-leverage liquidity is concentrated around the $58,500 mark. Hence, as Bitcoin prices approach this level, volatility is expected to increase, particularly given that overall market liquidity remains relatively low. This condition implies that any buy or sell order can significantly influence the market rate.

• “High-leverage liquidity zones near $58,500 could lead to heightened volatility and create trading opportunities as Bitcoin nears these levels,” Hyblock stated in an email to CoinDesk.
• “Additionally, the combined order book liquidity remains low, suggesting bullish potential, while the global bid-ask ratio is positive, indicating strong underlying demand,” Hyblock added.

At the time of writing, Bitcoin was trading at approximately $58,000, reflecting a 2.5% increase over the past 24 hours, according to CoinDesk data. Meanwhile, Ether (ETH), the second-largest cryptocurrency by market capitalization, saw a 1% rise, trading at $2,350, with an estimated leverage ratio of 0.35.