Data shows that the Ethereum leverage ratio has continued to see strong growth recently, which could lead to volatility in the ETH price.
Ethereum’s estimated leverage ratio recently reached new highs
As one analyst explains in a CryptoQuant Quicktake article, Ethereum’s estimated leverage ratio has been on an upward trajectory for some time now. “Estimated Leverage Ratio” here refers to an indicator that calculates the ratio between ETH open interest and derivatives exchange reserve.
The first of these, Open Interest, measures the total amount of asset-linked derivatives positions that are currently open on all centralized exchanges, and the second, the Derivatives Exchange Reserve, keeps track of the number of tokens in which investors have deposited. derivatives platforms.
When the value of the estimated leverage ratio increases, it means that the open interest increases relative to the foreign exchange reserve of derivatives. Such a trend implies that on average, users opt for higher leverage with their positions.
On the other hand, the decline in the indicator suggests that risk appetite might decrease among traders as they decrease the amount of leverage attached to their positions.
Now here is a chart that shows the estimated leverage ratio trend for Ethereum over the last year and a half:
The value of the metric appears to have been sharply going up over the last few months | Source: CryptoQuant
As seen in the chart above, Ethereum’s estimated leverage ratio has been on an upward trend over the past few months, implying that investors are increasingly willing to take on higher risks.
Historically, high market leverage has typically led to cryptocurrency price volatility. The reason is that massive liquidations become likely in such an environment.
During a mass liquidation event (popularly known as a squeeze), a sudden change in price triggers a large number of liquidations at once. These liquidations feed back into price action, causing even more liquidations.
Since Ethereum’s estimated leverage ratio is at extreme levels, the chances of traders finding a liquidation are high. However, it is uncertain which side of the market a possible squeeze in the near future would involve.
Long investors getting carried away by this event would naturally lead to a bearish outcome for ETH, while a short squeeze could trigger a wave of bullish price action. All that remains to be seen is how the volatility resulting from high leverage, if any, would end up affecting the asset.
ETH Price
At the time of writing, Ethereum is trading around $3,300, down about 1% over the past week.
Looks like the price of the coin has been trading sideways over the last few days | Source: ETHUSDT on TradingView
Featured image of Dall-E, CryptoQuant.com, chart from TradingView.com
