Data shows that investors in the Ethereum derivatives market have recently been very highly leveraged, which can lead to volatility in the asset.
Recently, Ethereum’s estimated leverage ratio has reached extreme levels.
As pointed out by the analyst in the CryptoQuant Quicktake post, the ETH expected leverage ratio has recently risen. “Expected Leverage Ratio” (ELR) refers to an indicator that tracks the ratio between Ethereum open interest and exchange reserves.
The former, Open Interest, is a measure of the total amount of ETH-related derivatives positions currently open on all centralized exchanges.
The second indicator, Exchange Reserve, naturally tells us the total number of tokens of the cryptocurrency in wallets connected to all exchanges.
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A rising value of ELR means that open interest is growing at a faster rate than foreign exchange reserves. This trend means that investors are, on average, choosing higher leverage. On the other hand, a decline in the indicator indicates a shift towards lower risk levels as derivatives market users reduce their positions.
Now here is a chart showing the trend of Ethereum ELR over the past few years:
As shown in the graph above, Ethereum ELR has seen steep growth recently. The asset’s sudden sharp upward trend occurred as news about cash exchange-traded funds (ETFs) surged toward approval.
Cryptocurrency prices also showed a rapid rise during the same period. Therefore, it is not surprising that the value of the indicator soared, as the conditions were perfect to spark new speculation related to the coin.
Even after ETF approval, the upward trend continued, but the price fell sideways. Investors appear willing to take on higher risks to bet big on where Ethereum can break out of this despite this consolidation.
Historically, high leverage ratios have meant higher volatility in asset prices. This is because mass liquidation events may be more likely to occur when investors are in overly leveraged positions.
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With the recent sideways trading of ETH and all these positions piling up, it may only take one break in either direction before these positions collapse. Having a large number of liquidations occurring at once will only amplify the price fluctuations that caused the liquidations.
It remains to be seen how the Ethereum price will develop in the future and, given the trend of ELR, whether a volatile move awaits it.
ETH price
May was a good month for Ethereum investors. This is because the asset is expected to end the month with a positive return of over 18%.
Dall-E, featured image from CryptoQuant.com, chart from TradingView.com