While the first quarter has historically been positive for Ethereum [ETH], the significant $10 billion leverage could pose a threat of liquidation and constrain its potential for growth.
Andrew Kang, one of the founders of Mechanism Capital, a crypto venture capital firm, suggested that ETH might trade within a range of $2,000 to $4,000 due to the existing leverage risks. According to him,
“$ETH has seen a surge of over $10 billion in leverage since the last election. Although the correction may be harsh, Ethereum is unlikely to crash completely. It is more likely to consolidate between $2,000 and $4,000 for an extended period.”
Prior to the US elections, the leverage in ETH, which represents borrowed assets for speculative trading, amounted to $9 billion. By December, this figure had skyrocketed to over $19 billion.
Subsequently, a sharp drop in prices triggered the liquidation of numerous positions, leading to ETH plummeting to around $3,100.
Could Excessive Leverage Hinder Ether’s Potential Growth?
Kang noted that the ETH ‘basis trade’ propelled by CME Futures had minimal impact on the high leverage since it was ‘delta-neutral’—meaning that every Ethereum purchase in the spot market was offset by a short position in the Futures market. The excessive leverage, he pointed out, was more a result of speculative trading activities.
The surge in ETH price driven by leverage in the past validated Kang’s concerns. Typically, when the increase in leverage Open Interest outpaces the rise in price during a rally, a correction and a temporary peak ensue.
This trend was evident in both early November and late December, each associated with a surge in ETH liquidations.
For instance, on December 20th, ETH witnessed liquidations exceeding $300 million, with long positions bearing the brunt of the losses. However, data from Coinglass indicates that historically, the first quarter has been the most robust period for ETH, registering an average gain of 81%.
Out of the past seven years, ETH experienced losses in just two first quarters. In essence, if historical patterns persist, ETH could witness substantial growth in the first quarter of 2025.
Nonetheless, the looming risk of liquidation may set a limit on the anticipated upswing. At the time of writing, ETH had recovered above $3,000 after dipping to $2,900 following a bearish move on Monday.