Ethereum Investors Take On Sky-High Leverage: Brace For Volatile Storm?
May 31 2024 - 12:00PM
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Data shows the investors in the Ethereum derivatives market have
been taking on very high leverage recently, something that could
lead to volatility for the asset. Ethereum Estimated Leverage Ratio
Has Been At Extreme Levels Recently As pointed out by an analyst in
a CryptoQuant Quicktake post, the ETH Estimated Leverage Ratio has
been on the up recently. The “Estimated Leverage Ratio” (ELR)
refers to an indicator that keeps track of the ratio between the
Ethereum Open Interest and Exchange Reserve. The former of these,
the Open Interest, here is a measure of the total amount of
derivatives positions related to ETH that are currently open on all
centralized exchanges. The second metric, the Exchange Reserve,
naturally tells us about the total number of tokens of the
cryptocurrency that are sitting in wallets attached to all
exchanges. Related Reading: This Bitcoin Metric Is “One Of Crypto’s
Top Leading Indicators”: Santiment When the ELR’s value rises, it
means that the Open Interest is increasing at a faster rate than
the Exchange Reserve. Such a trend implies that investors are
opting for a higher amount of leverage on average. On the other
hand, a decline in the indicator suggests the derivatives market
users are moving towards a lower amount of risk as they are
deleveraging their positions. Now, here is a chart that shows the
trend in the Ethereum ELR over the last few years: As displayed in
the above graph, the Ethereum ELR has observed some steep growth
recently. This sudden sharp uptrend in the asset came about as news
around the spot exchange-traded funds (ETFs) gained traction in the
buildup to the approval. The cryptocurrency’s price also registered
a sharp rally during the same time. Thus, the conditions were
perfect for attracting fresh speculation related to the coin, so
it’s not surprising that the indicator’s value saw a spike. The
rise has also continued beyond the approval of the ETFs, but the
price has fallen to a sideways movement. It would appear that the
investors are willing to take even higher risk despite this
consolidation, trying to bet big on where Ethereum could escape
from here. Historically, a high value of the leverage ratio has
meant a higher volatility for the asset’s price. This is because
mass liquidation events can become more probable to take place when
the investors are sitting in overleveraged positions. Related
Reading: How High Can Bitcoin Go Before A Top? Analyst Chimes In
With ETH trading sideways recently and all these positions building
up, it might take only one break in either direction before a lot
of these positions come crashing down. A large number of such
liquidations happening at once would only fuel further into the
price move that caused them, thus amplifying it. It now remains to
be seen how the Ethereum price develops in the coming days and if a
volatile move is waiting for it given the trend in the ELR. ETH
Price May has been a good time for Ethereum investors as the asset
is looking to close the month with positive returns of more than
18%. Featured image from Dall-E, CryptoQuant.com, chart from
TradingView.com
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