Data shows that indices related to Ethereum derivatives have surged recently, a sign that the price is at risk of experiencing a storm of instability.
Recently, both Ethereum open interest and leverage ratio have soared.
In a CryptoQuant Quicktake post, one analyst discussed the trends in Ethereum derivatives indicators. The metrics in question are open interest and expected leverage ratio.
First, open interest tracks the total amount of ETH-related contracts currently open across all derivatives platforms. This indicator naturally takes into account both long and short positions.
When the value of this indicator rises, it means that investors are taking new positions in the market. This trend suggests a growing interest in derivatives trading for the coin.
On the other hand, a bearish indicator means that market positions are falling. This could be due to investors deliberately shutting it out or the exchange forcing it to liquidate.
Now here is a chart showing the trend of Ethereum open interest over the past few years:
The value of the metric appears to have been shooting up in recent days | Source: CryptoQuant
The graph above shows that Ethereum open interest has been growing rapidly recently. It surpassed the previous all-time high (ATH) and set a new record of over $13 billion.
Considering the period of the last four months, the indicator has increased by more than 40%, which suggests an explosion of speculative interest surrounding cryptocurrencies.
However, as the trend in the second indicator of relevance, the estimated leverage ratio, suggests, this development may not be the healthiest one. This indicator measures the ratio between open interests and derivatives trading reserves.
Derivatives exchange reserves are, of course, the total amount of cryptocurrency held in wallets associated with all centralized derivatives exchanges.
The expected leverage ratio tells you what leverage or lending amount the average derivatives user in the Ethereum market is currently choosing.
Below is a chart for this indicator.
Looks like the value of the metric has been heading up over the last few weeks | Source: CryptoQuant
Looking at the graph, it is clear that Ethereum’s estimated leverage ratio has recently surged. This means that the increase in open interests is faster than the increase in derivatives trading reserves.
Investors are currently sitting at all-time high (ATH) leverage, which could be a bad sign for ETH as it means future volatility could crush overly leveraged positions and trigger a mass liquidation event called a squeeze.
The quant noted that the Ethereum funding ratio, which is the ratio between long and short positions, is currently positive, meaning it is more likely to contain the bullish side of the market if a squeeze occurs soon.
ETH price
As of this writing, Ethereum is trading at around $3,000, down nearly 7% over the past week.
The price of the coin seems to have been consolidating sideways recently | Source: ETHUSDT on TradingView
Dall-E, featured image from CryptoQuant.com, chart from TradingView.com