Leverage is Declining the Bitcoin Market – Here’s Why That is Bullish For the BTC Price
A measure of leverage in the Bitcoin market just fell to its lowest since late 2021, a sign that volatility inducing speculators are increasingly being washed out of the market, meaning that the world’s largest cryptocurrency by market capitalization may be in for calmer waters ahead.
Crypto analytics firm CryptoQuant’s “Estimated Leverage Ratio” (ELR) just fell to 0.195, its lowest since December 2021.
That’s down from a peak of 0.4 just before the collapse of cryptocurrency exchange FTX last November, which was the catalyst for Bitcoin hitting its 2022 bear market lows in the $15,000s.
CryptoQuant calculates its ELR by dividing the dollar value of open perpetual Bitcoin future contract positions by the number of Bitcoin tokens being held by derivatives exchanges (where traders open those perpetual Bitcoin future positions).
A lower number means that traders on derivatives exchanges are opening less leveraged positions proportional to the number of tokens they have on the exchange, essentially implying there is less speculation in the market.
As can be seen above, the relationship between CryptoQuant’s ELR and the BTC price is weak.
When Bitcoin was at record highs in late-2021, the ELR was around current levels, before the ELR then peaked when the Bitcoin price was around the $20,000 mark.
But a lower ELR could nonetheless still be bullish for the Bitcoin price, as when the market gets excessively leveraged, this can trigger volatility (as positions are stopped out).
Higher volatility can deter investors. A lower volatility profile ahead could be a key factor in attracting new retail and institutional investors to the space.
The drop in the ELR comes after wild liquidation-induced swings in the Bitcoin price on Wednesday.
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