Ethereum
Prepare for a volatile storm? — TradingView News
Data shows that investors in the Ethereum derivatives market have taken on very high leverage recently, which could lead to volatility for the asset.
Ethereum’s estimated leverage ratio recently reached extreme levels
As one analyst pointed out in a CryptoQuant Quicktake article, ETH’s estimated leverage ratio has increased recently. “Estimated Leverage Ratio” (ELR) refers to an indicator that tracks the ratio of Ethereum open interest to the exchange reserve.
The first of these, Open Interest, is a measure of the total amount of ETH-related derivative positions that are currently open on all centralized exchanges.
The second metric, exchange reserve, naturally tells us about the total number of cryptocurrency tokens stored in the wallets attached to all exchanges.
When the value of the ELR increases, it means that the open interest is increasing at a faster rate than the foreign exchange reserve. Such a trend implies that investors opt for higher leverage on average. On the other hand, a decline in the indicator suggests that derivatives market users are moving toward a lower level of risk as they deleverage their positions.
Now here is a chart that shows the trend of Ethereum ELR over the past few years:
NewsBTC
As seen in the chart above, Ethereum ELR has seen strong growth recently. This sudden upward trend in assets occurred as news about spot exchange-traded funds (ETFs) gained traction in the lead-up to approval.
The price of the cryptocurrency also saw a sharp rise during the same period. Thus, the conditions were perfect to attract new speculations related to the coin, so it is not surprising that the value of the indicator saw a spike.
The rise also continued beyond the ETF approval, but the price fell into a sideways movement. It looks like investors are willing to take even higher risks despite this consolidation, trying to bet big on how Ethereum might escape from here.
Historically, a higher value of the leverage ratio means greater volatility in the asset price. Indeed, mass liquidation events may become more likely when investors are in overleveraged positions.
With ETH trading sideways recently and all of these positions accumulating, it may only take one break in one direction or the other before a lot of these positions collapse. A large number of such liquidations occurring simultaneously would only further fuel the price movement that caused them, thereby amplifying it.
It now remains to be seen how the Ethereum price will develop in the coming days and whether a volatile movement awaits it given the ELR trend.
ETH Price
May has been a good month for Ethereum investors as the asset looks to close the month with positive returns of over 18%.