Data shows that metrics related to Ethereum derivatives have increased recently, a sign that the price is at risk of weathering a volatile storm.
Ethereum Open Interest and Leverage Ratio Increased Recently
In a CryptoQuant Quicktake article, an analyst discussed the trend of Ethereum-derived indicators. The metrics in question are open interest and estimated leverage ratio.
First, Open Interest keeps track of the total amount of ETH-related contracts currently open across all derivatives platforms. The metric naturally takes into account both long and short positions.
When the value of this measure increases, it means that investors are opening new positions in the market. Such a trend suggests that interest in derivatives trading for the coin is increasing.
On the other hand, the indicator recording a decline implies that market positions are declining. This could be due to investors deliberately closing them or exchanges forcibly liquidating them.
Now here is a chart that shows the trend of Ethereum Open Interest over the past few years:
The value of the metric appears to have been shooting up in recent days | Source: CryptoQuant
The chart above shows that Ethereum Open Interest has seen rapid growth recently. It surpassed the previous all-time high (ATH) to set a new record above $13 billion.
Looking at the last four months, the indicator has increased by more than 40%, suggesting an explosion of speculative interest around cryptocurrency.
However, this development is perhaps not the healthiest, as suggested by the evolution of the second indicator of relevance, the estimate of the leverage ratio. This metric measures the ratio of open interest to derivatives exchange reserve.
The derivatives exchange reserve is naturally the total amount of cryptocurrency stored in the wallets associated with all centralized derivatives exchanges.
The estimated leverage ratio tells us how much leverage or lending the average derivatives user on the Ethereum market is currently opting for.
Below is a chart for this indicator.
Looks like the value of the metric has been heading up over the last few weeks | Source: CryptoQuant
From the chart, it is apparent that Ethereum’s estimated leverage ratio has increased recently. This would mean that the increase in open interest was faster than the increase in the derivatives FX reserve.
Investors now have record leverage (ATH), which may be a bad sign for ETH as it implies that any volatility in the future could bring down overleveraged positions and cause a mass liquidation event called squeeze.
The quant pointed out that Ethereum’s funding rate, a ratio between long and short positions, is currently positive, suggesting that if a squeeze is to occur soon, it will likely involve the bull side of the market.
ETH Price
At the time of writing, Ethereum is floating around $3,000, down almost 7% over the past week.
The price of the coin seems to have been consolidating sideways recently | Source: ETHUSDT on TradingView
Featured image of Dall-E, CryptoQuant.com, chart from TradingView.com
