According to one metric, even though the values of Bitcoin and Ether have both dropped by more than 50% this year, their leverage ratios are at their greatest levels ever.
Some indicators suggest that the Bitcoin market is about to exit the tightest trading range it has experienced in over two years.
According to one metric, despite the fact that the values of Bitcoin and Ether have both declined by more than 50% this year, their leverage ratios are at their greatest levels ever. According to blockchain data provider CryptoQuant, it is computed by taking the open interest for perpetual swap contracts and dividing it by the number of coins held in reserve on exchanges.
Because perpetual contracts, unlike conventional calendar futures, never expire, they are favored by cryptocurrency traders in part because they let them maintain highly leveraged positions.
According to statistics published by Bloomberg, Bitcoin, which makes up approximately 40% of the total market value of all cryptocurrencies, was traded last week within a range of just about 5.4%, the smallest since October 2020. Following the slump of two years earlier, prices rose steadily for several months, finally driving Bitcoin to a record high in April 2021.
Since June, when the decline in cryptocurrency values was triggered by the breakdown of the Terra stablecoin ecosystem, the insolvency of Voyager Digital and Celsius Network, the closure of Three Arrows Capital and Terra hedge funds, and the bankruptcy of Voyager Digital.
More traders seem to be placing positive leveraged bets, despite recent hawkish remarks from the Federal Reserve regarding inflation and the economy’s continued pressure on riskier assets, including cryptocurrency.
Overall, the much-anticipated update on the Ethereum blockchain later this month is probably the main driver of the rising leverage. The most significant network in terms of commerce is about to switch from its present system, which relies on miners, to a more energy-efficient one, which uses staked currency. According to data acquired by blockchain research firm Kaiko, the open interest in perpetual swap contracts using Ether as the base currency hit a record high at the end of August.
Shiliang Tang, a chief investment officer of cryptocurrency asset investing company LedgerPrime, predicted that ETH leverage would increase as the Merge approached.
Skew, a data site, reports that financing rates for both Bitcoin and Ether perpetual have turned negative during the previous several weeks. Exchanges bind contracts to their underlying spot price using the so-called funding rate, often known as the cost of trading. Investors with long holdings pay interest to those with short positions when the rate is positive, and vice versa.
Because they are either betting on a failed or delayed switch to proof of stake for Ethereum or hedging long spot Ether holdings before the Merge, Kaiko assessed that traders are skewed to the negative.
