Data shows that investors in the ethereum derivatives market have been taking on very high leverage recently, something that could lead to volatility in the asset.
ethereum Estimated Leverage Ratio Has Been at Extreme Levels Recently
As noted by an analyst at CryptoQuant Quicktake mail, eth's estimated leverage ratio has recently increased. “Estimated Leverage Ratio” (ELR) refers to an indicator that tracks the relationship between ethereum open interest and exchange reserve.
The first of these, Open Interest, is a measure of the total number of eth-related derivatives positions that are currently open across all centralized exchanges.
The second metric, Exchange Reserve, naturally tells us about the total number of cryptocurrency tokens held in wallets attached to all exchanges.
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When the ELR value increases, it means that the open interest increases at a faster rate than the exchange reserve. This trend implies that investors are opting for a greater amount of leverage on average. On the other hand, a drop in the indicator suggests that derivatives market users are moving towards a lower amount of risk as they are deleveraging their positions.
Now, here is a chart showing the trend of ethereum's ELR over the past few years:
As shown in the chart above, ethereum's ELR has seen steep growth recently. This sudden and sharp bullish trend for the asset came as news about spot exchange-traded funds (ETFs) gained traction in the run-up to the approval.
The price of the cryptocurrency also recorded a strong rally during the same time. Therefore, the conditions were perfect to attract new speculation related to the currency, so it is not surprising that the value of the indicator has increased.
The rise has also continued beyond the approval of ETFs, but the price has fallen into a sideways movement. It would seem that investors are willing to take even bigger risks despite this consolidation, trying to bet big on where ethereum could escape from here.
Historically, a high leverage ratio value has meant greater asset price volatility. This is because mass liquidation events are more likely to occur when investors are in overleveraged positions.
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With eth trading sideways recently and all of these positions building up, it might only take one break in either direction before many of these positions collapse. A large number of such liquidations occurring at once would only further fuel the price movement that caused them, thus amplifying it.
It now remains to be seen how the price of ethereum evolves in the coming days and whether a volatile movement awaits given the trend of the ELR.
eth price
May has been a good time for ethereum investors, as the asset looks to close the month with positive returns of over 18%.
Dall-E Featured Image, CryptoQuant.com, TradingView.com Chart