A key measure of bitcoin (BTC) market leverage continues to slide, pointing to lower levels of price volatility ahead.
Bitcoin’s estimated leverage ratio, calculated by dividing the dollar value locked in active open perpetual futures contracts by the total amount held on derivatives exchanges, was 0.195 on Wednesday, according to data tracked by Bitcoin. , the lowest level since Dec. 20, 2021 analyst firm CryptoQuant.
The ratio has halved since October, suggesting the degree of leverage in the market to inflate profits has plummeted.
All other things being equal, lower leverage also means that the spot market is less sensitive to activity in the derivatives market. In other words, price volatility triggered by strong liquidations like the one on Wednesday (April 26) may become rare in the future.
A perpetual contract is a futures contract with no expiration date that uses a funding rate mechanism to peg the price to the spot price. Leverage allows users to open positions that are worth more than the amount or tokens deposited on the exchange. The use of leverage has resulted in traders being liquidated, being forced to cancel long or short positions due to insufficient margin. Large-scale liquidations will eventually cause market volatility.
Less volatility in bitcoin prices could attract more mainstream investors into the crypto market.
Estimated leverage has been plummeting since Sam Bankman-Fried’s FTX exchange went bust in early November. The exchange is known for its perpetual futures product, which offers leverage up to 20 times the amount that traders pledge.
The continued decline in leverage suggests that 75% of Bitcoin’s year-to-date gains have been driven by the spot market. The common assumption is that spot markets represent long-term investors, while derivatives represent institutions and seasoned traders/speculators.
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Mr. teacher
According to CoinDesk
