KUALA LUMPUR – The cryptocurrency market is likely to break out of its tightest trading range in nearly two years, according to matrices.
Bloomberg reports that the leverage ratio for Bitcoin and Ether are at an all-time high, despite the fact that the prices for both the cryptocurrencies have declined more than 50% in 2022.
Based on the blockchain data-site, CryptoQuant, this is computed by dividing the amount of open interest for perpetual swap contracts by the quantity of coins held in reserve on exchanges.
Darius Sit, co-founder of Singapore-based crypto investment fund QCP Capital, said that people believe the cryptocurrency market has stabilised and they are willing to take on larger speculative positions.
He said that traders who perceive a so-called “tail risk” are “getting priced out.”
Crypto traders choose perpetual contracts partly due to the fact that it enables them to maintain their highly leveraged positions as, unlike the traditional calendar futures, the contracts do not expire.
Bitcoin, which accounts for almost 40% of the total market value of all cryptocurrencies, fluctuated within a range of approximately 5.4% last week, the smallest since October 2020, according to statistics published by Bloomberg.
The two-year lull was followed by a months-long price increase that brought Bitcoin to an all-time high in April 2021.
The cryptocurrency market have stagnated since June of this year with token prices tumbling after the collapse of the Terra stablecoin ecosystem along with other problems faced by large players in the industry such as Three Arrows Capital, Voyager Digital, and Celsius Network.
On Sept 7, the prices of Bitcoin and Ether had both increased by 0.8% and 4.3% respectively.
Despite recent hawkish remarks from the Federal Reserve regarding inflation and the economic downturn continuing to weigh on riskier assets, including cryptocurrency, it appears that more traders are placing bullish leveraged bets.
Overall, the most influential factor in the rising leverage is likely the widely anticipated Ethereum blockchain upgrade later this month. The network with the greatest economic significance will transition from its current system of using miners to a more energy-efficient one of using staked currencies.
Open interest in Ether-denominated perpetual swap contracts reached an all-time high at the end of August, according to data collected by blockchain research firm Kaiko.
“As the Merge approaches, ETH leverage will continue to increase,” said Shiliang Tang, chief investment officer at the crypto asset investing firm LedgerPrime.
Moreover, according to data-site Skew, financing rates for both Bitcoin and Ether perpetuals have become negative in recent weeks. Exchanges in the cyrptocurrency market utilise the so-called funding rate, often known as the cost to trade, to link contracts to their underlying spot price. When the rate is positive, investors with long positions pay interest to those with short positions, and vice versa.
Kaiko estimated that traders are bearish because they are either speculating on a failed or delayed transition of Ethereum to proof of stake, or they are hedging long spot Ether positions in advance, ahead of the Merge.
“The expansion of leverage with more bears could lead to a short squeeze, as over-leveraged bears get liquidated if prices rise,” said Andrew Tu, head of growth at crypto algorithmic-trading firm Efficient Frontier, which takes neutral trading positions.
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