On-chain data shows Bitcoin leverage ratio has hit a new all-time high (ATH). This may mean that a price correction could soon follow.
Bitcoin Leverage Ratio Reaches New Highs, Correction Incoming?
As pointed out by an analyst in a CryptoQuant post, the BTC leverage ratio has made a new ATH recently. This increases the possibility of a correction happening soon to flush out all the excess leverage.
The “all exchanges estimated leverage ratio” is an indicator that estimates how much leverage is used by Bitcoin investors on derivatives exchanges, on average.
There are two related metrics here. The first is the “open interest,” which measures the total amount of futures contracts currently open in the market. And the other is the “exchange reserve” that tells us how much BTC is stored in derivatives exchange wallets.
The value of the leverage ratio is calculated as the open interest divided by the exchange reserve. With the help of this metric, it becomes possible to tell whether investors are currently taking low risk or high risk.
When the value of the indicator rises, it means investors are taking on more leverage. High values of the metric may mean the market is currently over-leveraged, which could lead to higher volatility in Bitcoin.
Related Reading | Quant Explains How Large Bitcoin Leverage Ratio Can Help Turnaround Price
On the other hand, low values of the indicator imply there isn’t much leverage in the market right now. Here is a chart that shows the trend in the BTC leverage ratio over the past few months:
Looks like the indicator has recently hit a new ATH | Source: CryptoQuant
As you can see in the above graph, the Bitcoin leverage ratio has been on the rise lately. Just recently the metric also achieved a new all-time high.
Related Reading | Growth Of Bitcoin ETFs & Other Instruments Doesn’t Support Supply Shock Narrative
The quant believes that such high values of the ratio may mean that a correction in the price of the coin could soon come, wiping away all the excess leverage with it.
At the time of writing, Bitcoin’s price floats around $50.9k, up 11% in the last seven days. Over the past thirty days, the crypto has stacked 6% in losses.
The below chart shows the trend in the price of BTC over the last five days.
BTC's price surged up a few days ago, but has since moved sideways | Source: BTCUSD on TradingView
Bitcoin has established a footing above the $50k price level in the past few days, but it’s unclear at the moment when the coin might retest higher levels. If the leverage ratio is anything to go by, another correction might soon wipe away this recovery instead.
Featured image from Unsplash.com, charts from TradingView.com, CryptoQuant.com