Bitcoin Bearish Signal: Leverage Ratio Is Still Very High

On-chain data shows the Bitcoin leverage ratio still has a very high value, a sign that has usually proven to be bearish for the crypto in recent months.

Bitcoin Exchange Leverage Ratio Has Been Going Up In Recent Weeks

As pointed out by an analyst in a CryptoQuant post, the BTC all exchanges leverage ratio is still quite high, suggesting that the crypto could still see further downtrend.

The “leverage ratio” is an indicator that is defined as the ratio between the open interest and the all derivatives exchange reserve.

Here, the “open interest” is a measure of the total amount of Bitcoin futures positions currently open in the derivatives market.

And the “derivatives exchange reserve” is just the total number of coins currently stored in wallets of all derivatives exchanges.

What the leverage ratio tells us is how much leverage users are taking on average in the BTC futures market right now.

When the value of this indicator is high, it means users are taking a large amount of risk in the form of leverage at the moment. An excess of leverage usually leads to higher volatility in the market.

Related Reading | Bitcoin On-Chain Data: Miners Deposit Big To Derivatives Exchanges

On the other hand, lower values of the ratio can result in lesser relative volatility in the crypto’s price since users aren’t taking much risk.

Now, here is a chart that shows the trend in the Bitcoin all exchanges leverage ratio over the last year:

The value of the metric seems to have been quite high in recent days | Source: CryptoQuant

As you can see in the above graph, whenever the Bitcoin leverage ratio has hit a steep value during the last several months, both the indicator and the coin’s price has subsequently plunged down.

Mass leverage flushes like these are called “liquidation squeezes.” During such events, liquidations cascade together and amplify the price move that triggered the squeeze.

Related Reading | Why Bitcoin Is Undervalued According To This Expert’s “Conservative” Model

Since the price moved in the same direction as the squeeze in these instances, they were all examples of a “long squeeze.”

It looks like the ratio’s value is once again high right now. If a similar trend as in the last few months follows this time as well, then a long squeeze may be coming  soon and taking Bitcoin in for another plummet.

BTC Price

At the time of writing, Bitcoin’s price floats around $20.5k, up 4% in the last week. Over the past month, the crypto has lost 30% in value.

Looks like the value of the crypto has been going down over the last few days | Source: BTCUSD on TradingView Featured image from mana5280 on Unsplash.com, charts from TradingView.com, CryptoQuant.com