In the past week, Bitcoin has surged to an all-time high on the price charts, causing a wave of excitement in the market. This surge, which saw Bitcoin reaching $77,270, has led to increased leverage across various platforms.
A Unique Market Situation
Recent analysis by IntoTheBlock has revealed that Bitcoin’s leverage ratio has reached a level unseen in the past two years.
The report highlights that the Open Interest in BTC perpetual swaps in relation to its market cap has reached unprecedented levels since the collapse of FTX in 2022.
When referring to Bitcoin’s leverage hitting a 2-year high, it signifies that more traders are using borrowed funds to engage in BTC trading compared to the previous two years. This ratio compares the Open Interest amount to the cryptocurrency’s market cap.
An increased leverage ratio is significant as it suggests that investors are more confident in their Bitcoin price predictions. However, heightened leverage often leads to more volatility in the market. Even a minor price fluctuation can trigger liquidations, resulting in significant price swings.
It is essential to note that previous spikes in the leverage ratio in 2021 led to market corrections due to excessive liquidations, resulting in a market downturn.
In essence, a rise in the leverage ratio indicates a potential market retraction towards more sustainable levels.
The potential unsustainability of the current rally is further supported by a decreasing NVT Golden Cross.
While a golden cross typically signals bullish market trends, a declining NVT Golden Cross suggests that the ongoing price surge could be driven by speculative investments rather than actual network usage. This indicates the possibility of the asset being overvalued based on network activity.
This notion is reinforced by a decrease in active addresses. From a peak of 901k, the number of active addresses has dropped to 835k, according to IntoTheBlock.
A reduction in active addresses implies lower network participation and usage.
Implications for Bitcoin’s Price Movement
Over-leveraging tends to make the market more susceptible to price fluctuations.
When a large segment of the market is over-leveraged, even minor price declines can trigger liquidations, leading to sharp sell-offs and increased volatility. In such scenarios, Bitcoin’s price may experience a pullback, seeking support around the $73,600 mark.