Data shows the Ethereum Leverage Ratio has continued to see sharp growth recently, something that could lead to volatility for ETH’s price.
Ethereum Estimated Leverage Ratio Has Been Setting New Highs Recently
As explained by an analyst in a CryptoQuant Quicktake post, the Ethereum Estimated Leverage Ratio has been following an upward trajectory for a while now. The “Estimated Leverage Ratio” here refers to an indicator that calculates the ratio between the ETH Open Interest and Derivatives Exchange Reserve.
The former of these, the Open Interest, measures the total amount of derivatives positions related to the asset that are currently open on all centralized exchanges, and the latter, the Derivatives Exchange Reserve, keeps track of the number of tokens that investors have deposited into derivatives platforms.
When the value of the Estimated Leverage Ratio rises, it means the Open Interest is going up relative to the Derivatives Exchange Reserve. Such a trend implies that, on average, the users are opting for a higher amount of leverage with their positions.
On the other hand, the indicator going down suggests the appetite for risk may be going down among the traders as they are decreasing the amount of leverage attached to their positions.
Now, here is a chart that shows the trend in the Estimated Leverage Ratio for Ethereum over the past year and a half:
The value of the metric appears to have been sharply going up over the last few months | Source: CryptoQuant
As displayed in the above graph, the Ethereum Estimated Leverage Ratio has been riding an uptrend for the past few months, implying the investors have increasingly been willing to take on higher risk.
Historically, a high amount of leverage in the market has generally led to volatile price action for the cryptocurrency. The reason behind this is the fact that mass liquidation events become probable to occur in such an environment.
During a mass liquidation event (popularly known as a squeeze), a sudden swing in the price triggers a large amount of liquidations at once. These liquidations feed back into the price move, causing even more liquidations.
Given that the Ethereum Estimated Leverage Ratio is sitting at extreme levels, the chances of traders finding liquidation are high. It’s uncertain, though, which side of the market a potential squeeze in the near future would involve.
Long investors getting wrapped up in the event would naturally lead to a bearish outcome for ETH, while a short squeeze could kickstart a wave of bullish price action. It only remains to be seen how the volatility emerging from the high leverage, if any, would end up affecting the asset.
ETH Price
At the time of writing, Ethereum is trading around $3,300, down around 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 from Dall-E, CryptoQuant.com, chart from TradingView.com
