Leverage in the bitcoin {{BTC}} market is growing again, a sign traders are looking to take on more risk, potentially injecting volatility into the market.
The so-called estimated leverage ratio, which divides global futures open interest by the number of coins held on exchanges, has jumped to 0.2060, the highest since October 2023, according to data tracked by analytics firm CryptoQuant .
The increase follows a months-long consolidation below 0.20, pointing to traders increasingly using borrowed funds to amplify their futures positions and a risk-on environment. A low ratio suggests a cautious approach.
The estimated leverage ratio peaked following the collapse of Sam Bankman Fried's FTX exchange, formerly the third-largest futures trading platform in late 2022 and trended lower till December 2023.
Leverage allows traders to control larger positions with relatively little capital, magnifying both profits and losses. It's a double-edged sword that exposes traders to margin shortages and forced liquidations when the market moves against their positions, which, in turn, adds to price volatility.
"The recent increase in the Bitcoin Estimated Leverage Ratio suggests a growing trend among investors toward higher leverage in the derivatives market," CryptoQuant said in a blog post.
$58,500 is the key level
According to Hyblock Capital, high-leverage liquidity is stacked at around $58,500. So, once prices approach that level, volatility could pick up, especially because overall market liquidity remains low. That means a buy/sell order can have an outsized impact on the going market rate.
"High-leverage liquidity zones around $58,500 could drive increased volatility and create opportunities for traders as Bitcoin gravitates toward these levels," Hyblock said in an email to CoinDesk.
"Combined order book liquidity remains low, suggesting bullish potential, while the global bid-ask ratio remains positive, indicating robust underlying demand," Hyblock added.
At press time, bitcoin changed hands at around $58,000, representing a 2.5% over 24 hours, according to CoinDesk data. Ether {{ETH}}, the second largest cryptocurrency by market value, traded 1% higher at $2,350, with an estimated leverage ratio of 0.35.
