09 January, 2022
Bitcoin’s Estimated Leverage Ratio now at New ATH, Here’s What it Means for Investors

Bitcoin is experiencing a market cascade that has seen prices drop down to below $42,000. Bitcoin derivatives liquidations have been massive in the past few days. According to data from Coinglass, more than $500 million worth of Bitcoin liquidations has occurred in the last 3 days.

Despite the massive liquidations, data suggests that more investors are entering the derivatives market. This was noted by Colin Wu, a Chinese journalist with the moniker Wu Blockchain on Twitter. Wu pointed to data from blockchain analytics firm Crypto Quant that suggests that investors were increasing their Bitcoin exposure and taking on high leverage.

According to CryptoQuant, the estimated leverage ratio (ELR) of BTC on the exchange reached 0.226, continuing to hit a new high. The growth in estimated leverage indicates that more and more investors are increasing their exposure and taking on high leverage.

What does this mean for Bitcoin’s dominance in the market?

The estimated leverage ratio (ELR) is defined as the ratio of open interest divided by the reserve of an exchange and indicates how much leverage is used by users on average according to CryptoQuant. It is interpreted by noting its trend. By its recent trend, where the ELR has been increasing, it speaks strongly of investors’ confidence in Bitcoin. CryptoQuant says this about the metric:

“(ELR) Increasing in values indicates more investors are taking high leverage risk in the derivatives trade. Also, if ELR value is high compared to the last couple of days, it indicates traders are quite confident in their positions.”

Evidence of this confidence investors are showing can be found in the fact that they have been buying the dip. Data from BitInfoCharts shows that Bitcoin whale wallets that are not crypto exchanges have been scooping up Bitcoin at the discounted price. As noted by Colin Wu, the 33rd largest Bitcoin address increased its holding by 3000 Bitcoins, while 1455 Bitcoins were added to the 34th largest Bitcoin wallet.

While the dip buying and increasing exposure is quite bullish for Bitcoin, many market analysts have said that Bitcoin has entered a full-fledged bear market. CryptoWhale expects the Bitcoin bear market to pull Bitcoin’s price to the regions of $10,000 before the year runs out.

Remarkably, the Bitcoin market crash began on Wednesday after the U.S Federal Reserve Bank released the minutes of its meeting in December in which the central bank indicated it would change its supportive monetary policy by reducing the amount of bonds it holds and raising interest rates soon. The announcement had an impact on the stock market and other cryptocurrencies as well.

Another macroeconomic event that may be contributing to the falling price of Bitcoin is the internet blackout in Kazakhstan, that has put up to 12% of the Bitcoin mining network offline.


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