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Data suggests that investors in the Ethereum derivatives market have been using very high leverage recently, something that could lead to volatility of the asset.
Ethereum’s estimated leverage ratio has reached extreme levels recently
As one analyst at CryptoQuant Quicktake pointed out mail, ETH’s estimated leverage ratio has increased recently. the “Estimated leverage ratioELR refers to an indicator that tracks the ratio between Ethereum’s open interest and exchange reserve.
The former of these, Express interestBelow is a measure of the total amount of ETH-related derivatives positions currently open on all centralized exchanges.
The second scale, Exchange reservenaturally tells us the total number of cryptocurrency tokens present in the wallets linked to all exchanges.
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When the ELR value rises, it means that the open interest is increasing at a faster rate than the exchange reserve. This trend implies that investors are choosing greater leverage on average. On the other hand, a decrease in the index indicates that derivatives market users are taking less risk as they reduce their positions.
Now, here is a chart showing the trend in Ethereum ELR over the past few years:
As shown in the chart above, Ethereum ELR has observed some sharp growth recently. This sudden sharp uptrend originally came as news about exchange-traded funds (ETFs) gained momentum in the run-up to approval.
The price of the cryptocurrency also recorded a sharp rise during the same time. Thus, the conditions were ideal to attract new speculation related to the currency, so it is not surprising that the value of the index saw a significant rise.
The rally also continued after the ETF approval, but the price fell into a sideways movement. Investors appear to be willing to take higher risks despite this consolidation, trying to bet big on where Ethereum can run from here.
Historically, a higher value of the leverage ratio meant higher volatility of the asset price. This is because mass liquidation events can become more likely to occur when investors sit in highly leveraged positions.
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With ETH trading sideways lately and all these positions accumulating, it may only take one break in either direction before a lot of these positions collapse. A large number of these liquidations occurring simultaneously will only increase, and thus amplify, the price movement they have caused.
It now remains to see how the Ethereum price develops in the coming days and whether a volatile movement awaits it given the trend in ELR.
Ethereum price
May has been a good time for Ethereum investors as the asset looks to close out the month with positive returns of over 18%.
Featured image by Dall-E, CryptoQuant.com, chart from TradingView.com
