Bitcoin's 'Estimated Leverage Ratio' Hits Lowest Point Since December 2021

The estimated ratio indicates how much leverage is used by traders on average, according to CryptoQuant.

AccessTimeIconApr 27, 2023 at 7:50 a.m. UTC
Updated Apr 27, 2023 at 3:06 p.m. UTC
10 Years of Decentralizing the Future
May 29-31, 2024 - Austin, TexasThe biggest and most established global hub for everything crypto, blockchain and Web3.Register Now

A key metric gauging the use of leverage in the bitcoin (BTC) market continues to slide, signaling low price volatility in the future.

Bitcoin's estimated leverage ratio, calculated by dividing the dollar value locked in the active open perpetual futures contracts by the total number of coins held by derivatives exchanges, fell to 0.195 on Wednesday, reaching the lowest since Dec. 20, 2021, per data tracked by analytics firm CryptoQuant.

Since October the ratio has halved, indicating a sharp decline in the degree of leverage employed in the market to magnify returns.

Other things being equal, a dwindling ratio also means less sensitivity of the spot market to the derivatives market activity. In other words, episodes of liquidations-induced wild price swings, the likes of which was seen on Wednesday, may become rare going forward.

Perpetuals are futures contracts with no expiry that use the funding rate mechanism to keep prices tethered to the spot market price. Leverage allows users to open positions worth more than the money or coins deposited at the exchange. The use of leverage exposes traders to liquidations – forced unwinding of bullish long or bearish short positions due to margin shortage. Mass liquidations end up injecting volatility into the market.

A reduced bitcoin price volatility may bring more mainstream participation in the crypto market.

The ratio has halved since October. (CryptoQuant)
The ratio has halved since October. (CryptoQuant)

The estimated leverage ratio has been in free fall since Sam Bankman-Fried's FTX went bust in early November. The exchange was known for its perpetual futures product, offering leverage up to 20 times the collateral traders posted.

The continued decline in the leverage ratio suggests that bitcoin's year-to-date rally of 75% has been spot market driven. The popular assumption is that the spot market is a proxy for long-term investors, while derivatives represent institutions and sophisticated traders/speculators.

Edited by Parikshit Mishra.

Disclosure

Please note that our privacy policy, terms of use, cookies, and do not sell my personal information has been updated.

CoinDesk is an award-winning media outlet that covers the cryptocurrency industry. Its journalists abide by a strict set of editorial policies. In November 2023, CoinDesk was acquired by the Bullish group, owner of Bullish, a regulated, digital assets exchange. The Bullish group is majority-owned by Block.one; both companies have interests in a variety of blockchain and digital asset businesses and significant holdings of digital assets, including bitcoin. CoinDesk operates as an independent subsidiary with an editorial committee to protect journalistic independence. CoinDesk employees, including journalists, may receive options in the Bullish group as part of their compensation.

Omkar Godbole

Omkar Godbole is a Co-Managing Editor on CoinDesk's Markets team.


Learn more about Consensus 2024, CoinDesk's longest-running and most influential event that brings together all sides of crypto, blockchain and Web3. Head to consensus.coindesk.com to register and buy your pass now.


Read more about