Ethereum Investors Take On Sky-High Leverage: Brace For Volatile Storm?

Data
shows
the
investors
in
the
Ethereum
derivatives
market
have
been
taking
on
very
high
leverage
recently,
something
that
could
lead
to
volatility
for
the
asset.

Ethereum
Estimated
Leverage
Ratio
Has
Been
At
Extreme
Levels
Recently

As
pointed
out
by
an
analyst
in
a
CryptoQuant
Quicktake

post,
the
ETH
Estimated
Leverage
Ratio
has
been
on
the
up
recently.
The
“Estimated
Leverage
Ratio”
(ELR)
refers
to
an
indicator
that
keeps
track
of
the
ratio
between
the
Ethereum
Open
Interest
and
Exchange
Reserve.

The
former
of
these,
the

Open
Interest,
here
is
a
measure
of
the
total
amount
of
derivatives
positions
related
to
ETH
that
are
currently
open
on
all
centralized
exchanges.

The
second
metric,
the

Exchange
Reserve,
naturally
tells
us
about
the
total
number
of
tokens
of
the
cryptocurrency
that
are
sitting
in
wallets
attached
to
all
exchanges.

Related
Reading

When
the
ELR’s
value
rises,
it
means
that
the
Open
Interest
is
increasing
at
a
faster
rate
than
the
Exchange
Reserve.
Such
a
trend
implies
that
investors
are
opting
for
a
higher
amount
of
leverage
on
average.
On
the
other
hand,
a
decline
in
the
indicator
suggests
the
derivatives
market
users
are
moving
towards
a
lower
amount
of
risk
as
they
are
deleveraging
their
positions.

Now,
here
is
a
chart
that
shows
the
trend
in
the
Ethereum
ELR
over
the
last
few
years:

As
displayed
in
the
above
graph,
the
Ethereum
ELR
has
observed
some
steep
growth
recently.
This
sudden
sharp
uptrend
in
the
asset
came
about
as
news
around
the
spot
exchange-traded
funds
(ETFs)
gained
traction
in
the
buildup
to
the
approval.

The
cryptocurrency’s
price
also
registered
a
sharp
rally
during
the
same
time.
Thus,
the
conditions
were
perfect
for
attracting
fresh
speculation
related
to
the
coin,
so
it’s
not
surprising
that
the
indicator’s
value
saw
a
spike.

The
rise
has
also
continued
beyond
the
approval
of
the
ETFs,
but
the
price
has
fallen
to
a
sideways
movement.
It
would
appear
that
the
investors
are
willing
to
take
even
higher
risk
despite
this
consolidation,
trying
to
bet
big
on
where
Ethereum
could
escape
from
here.

Historically,
a
high
value
of
the
leverage
ratio
has
meant
a
higher
volatility
for
the
asset’s
price.
This
is
because
mass
liquidation
events
can
become
more
probable
to
take
place
when
the
investors
are
sitting
in
overleveraged
positions.

Related
Reading

With
ETH
trading
sideways
recently
and
all
these
positions
building
up,
it
might
take
only
one
break
in
either
direction
before
a
lot
of
these
positions
come
crashing
down.
A
large
number
of
such
liquidations
happening
at
once
would
only
fuel
further
into
the
price
move
that
caused
them,
thus
amplifying
it.

It
now
remains
to
be
seen
how
the
Ethereum
price
develops
in
the
coming
days
and
if
a
volatile
move
is
waiting
for
it
given
the
trend
in
the
ELR.

ETH
Price

May
has
been
a
good
time
for
Ethereum
investors
as
the
asset
is
looking
to
close
the
month
with
positive
returns
of
more
than
18%.

Featured
image
from
Dall-E,
CryptoQuant.com,
chart
from
TradingView.com