Bitcoin Estimated Leverage Ratio Spikes To New High — Fresh Volatility Ahead?

[Ben Graham]

After surging toward the $100,000 mark a few days into the new year, the price of Bitcoin looks set to end January in stark contrast to how it started the month. On Thursday, January 29, the flagship cryptocurrency fell to a multi-month low of around $81,500, with the general market sentiment worsening over the past few weeks.

Going into the weekend, the price of Bitcoin has somewhat cooled off, recovering above the $93,000 level on Friday, January 30. Interestingly, the latest on-chain data suggests that the market leader is only on the verge of another violent price movement.

BTC Setting Up For A Violent Liquidation Cascade

In a Quicktake post on the CryptoQuant platform, CryptoOnchain shared insights into the current on-chain condition of the Bitcoin price. According to the market quant, the Bitcoin Estimated Leverage Ratio (ELR) witnessed a notable upswing on Binance, the world’s largest crypto exchange, while price was undergoing its most recent correction. 

For context, the Estimated Leverage Ratio is an on-chain metric that tracks the ratio between open interest and the reserve of an exchange (Binance, in this case). This metric measures the average amount of leverage used by the traders in a particular market or exchange. 

A higher ELR signals a higher market risk, suggesting that small price movements could lead to significant liquidations. According to data from CryptoQuant, CryptoOnchain highlighted that the Bitcoin Estimated Leverage Ratio recently spiked to a critical level of 0.188 when the price fell to around $81,500, indicating that the Open Interest is exceptionally high relative to the exchange’s reserves.

Furthermore, CryptoOnchain shared that the divergence between rising leverage and falling prices is a classic “bearish divergence” signal in the derivative market. “It indicates that despite the price weakness, traders are aggressively increasing their leverage positions,” the on-chain expert added.

What’s more, CryptoOnchain revealed that when the market becomes heavily over-leveraged during a price correction, it implies that the traders are either “buying the dip” with high leverage or increasingly taking short positions. The market quant said this setup usually precedes a “violent liquidation cascade.”

Overall, CryptoOnchain concluded that the market is currently in a high-tension zone, with the combination of peak leverage and low prices suggesting that a “squeeze” is imminent. The analyst, however, clarified that the direction of the next violent movement depends on the dominant side (bulls or bears)  of the market. 

Bitcoin Price At A Glance

As of this writing, the price of BTC stands at around $84,200, reflecting a nearly 1% jump in the past 24 hours.