Recent data indicates that Ethereum’s leverage ratio has been on a notable rise, a trend that could introduce some volatility to ETH’s price dynamics.
Recently, Ethereum’s Estimated Leverage Ratio has been reaching unprecedented heights. This measurement, discussed in a recent CryptoQuant Quicktake post, is calculated by comparing ETH’s Open Interest with the Derivatives Exchange Reserve. To break it down: Open Interest reflects the total number of derivative contracts related to ETH that remain open across all centralized exchanges, while the Derivatives Exchange Reserve tracks the ETH tokens that investors have locked into derivative platforms.
When the Estimated Leverage Ratio climbs, it signals that Open Interest is outpacing the Derivatives Exchange Reserve. Essentially, this means traders are generally opting for more leverage in their positions. Conversely, a decline in this ratio suggests a reduced risk appetite, with traders pulling back on leverage.
Take a look at the chart below to get a sense of how Ethereum’s Estimated Leverage Ratio has fluctuated over the past eighteen months:
The leverage ratio has been on an uptick lately. | Source: CryptoQuant
As the graph illustrates, there’s been a consistent rise in the Estimated Leverage Ratio for Ethereum over the recent months, hinting at a growing risk appetite among investors. Historically, excess leverage often leads to heightened market volatility for cryptocurrencies. This is because highly leveraged conditions set the stage for mass liquidation events, also known as squeezes.
When a price shift triggers numerous liquidations, it can propel even more rapid price changes, causing a domino effect. Currently, Ethereum’s leverage ratios are quite high, increasing the likelihood of liquidation events. However, it remains to be seen which side of the market will be impacted. A squeeze affecting long positions might lead to bearish trends, while a short squeeze could spark bullish momentum. We will have to wait and see how ETH will be influenced by this potential volatility.
Talking about Ethereum’s market value, as of now, it’s priced at approximately $3,300, having dipped about 1% over the past week.
The price seems to have been moving sideways in recent days. | Source: ETHUSDT on TradingView
Featured image from Dall-E, data source: CryptoQuant.com, chart: TradingView.com
