Bitcoin bearish signal: the leverage ratio is increasing

On-chain data shows that both the Bitcoin leverage ratio and forward open interest have been rising recently, a sign that could prove bearish for the crypto’s price.

Bitcoin Leverage Ratio Estimation and Increase in Open Interest

As one analyst pointed out in a CryptoQuant, the BTC futures market appears to have warmed up over the past day.

To understand the leverage ratio, two other parameters must first be considered. These are “open interest” and “derivative foreign exchange reserve”.

Open Interest is an indicator that measures the total amount of contracts currently open in the Bitcoin futures market. The metric includes both short and long positions.

The other indicator, the derivatives exchange pool, tells us about the total number of coins currently in the wallets of all derivatives exchanges.

Now the first metric divided by the second gives us the “estimated leverage ratio”. This indicator signifies the average amount of leverage used by users on derivatives exchanges.

Here is a chart that shows the trend of Bitcoin leverage ratio, as well as open interest, over the past month:

The value of the two metrics has sharply risen recently | Source: CryptoQuant

As you can see in the chart above, the Bitcoin leverage ratio and open interest have increased over the past 24 hours as the value of the coin has also seen an increase.

This means that at present, not only the average leverage is very high, but the total number of positions is also quite large.

The chart also includes data on the Funding Rate, another indicator that tells us about the relationship between long and short positions. It seems that currently its value is positive, which suggests that long positions are more dominant.

Historically, such a setup has generally resulted in higher volatility in the market. This is because high leverage means that any price movement will result in a large number of liquidations, further widening the movement in question.

This stretched price movement in turn leads to more liquidations. When liquidations follow one another in this manner, the event is called a “squeeze”.

Since there are more long positions in the market right now and the leverage is high, a long squeeze could occur. If that happens, Bitcoin’s latest bullish momentum could be slowed down.

BTC price

As of this writing, the price of Bitcoin is hovering around $23.9,000, up 3% in the past week.

Bitcoin Price Chart

Looks like the value of the crypto has spiked up during the last day | Source: BTCUSD on TradingView
Featured image from Natarajan sethuramalingam on Unsplash.com, charts from TradingView.com, CryptoQuant.com