20 October 2024
Over the past week, Bitcoin (BTC) has been enjoying attention from all tiers of investors; from short-term traders to institutional players. This can be seen in the strong performance of spot Bitcoin ETFs in the previous week. Similarly, the Bitcoin derivatives market appears to be witnessing increased risk-taking behavior from traders as shown by recent on-chain data.
Bitcoin Market Now In ‘A Risk Zone’ — What’s Happening?
Leverage is a tool that allows traders to control substantial positions with a relatively small amount of capital. While leverage helps traders and investors bolster their potential profits, it also opens them up to significant risks, especially when the market volatility is elevated.
In a recent Quicktake post on the CryptoQuant platform, an analyst with the pseudonym Crazzyblockk revealed that there has been increased leverage use amongst Bitcoin market participants. This on-chain observation is based on the Estimated Leverage Ratio (ELR) metric, which measures the ratio of open interest in futures contracts to the coin reserves on exchanges.
Crazzyblockk noted that the reserves of some large-cap stablecoins are also considered in the calculation of the Estimated Leverage Ratio. “This is based on the concept that stablecoins have been increasingly used as collateral for derivative trading in recent years,” the analyst added.
The Estimated Leverage Ratio serves as a valuable indicator in assessing the amount of leverage used by market participants for trading derivatives. According to the CryptoQuant analyst, the ELR metric has witnessed a notable upswing over the past few months, which signals increasing open interest and dwindling exchange reserves, particularly Bitcoin.
Furthermore, the Bitcoin derivatives market has now seemingly entered a risk zone due to the sharp increase in the leverage being used by market participants. According to the Quicktake post, this implies that the market is susceptible to spontaneous price movements in any direction. Hence, short-term traders might want to approach the market with caution.
Has BTC Price Established A Local Top?
As of this writing, the price of Bitcoin stands at around $68,400, reflecting no significant change in the past day. According to data from CoinGecko, the premier cryptocurrency is up by over 8% in the past week.
In a separate Quicktake post, an analyst revealed that the price of Bitcoin might be readying for a brief correction after printing a local top. This analysis is based on the increasing non-realized profits of Bitcoin traders in recent weeks.
According to CryptoQuant data, the unrealized profits of BTC traders have surpassed $7 billion, which suggests potential selling pressure in the near future. And the risk of a price pullback rises when investors sit on such significant unrealized gains, as there is an increased temptation of taking a profit.