Key Points
- Bitcoin’s leverage ratio has reached a two-year high, indicating increased confidence but also potential volatility.
- A declining NVT Golden Cross and decrease in active addresses suggest the current price surge may be driven by speculation.
Bitcoin has seen a significant increase in its value over the past week, with a rise of 10.21%. This surge has led to a new all-time high (ATH) of $77,270. This increase has not only caused market excitement but has also led to a rise in leverage across the board.
A Two-Year High
An analysis by IntoTheBlock reveals that the leverage ratio for Bitcoin has reached a two-year high. This means that more traders are using borrowed funds to trade Bitcoin than at any point in the last two years. This ratio is calculated by comparing the amount of Open Interest to the market cap of the cryptocurrency.
A higher leverage ratio is significant as it shows that investors are increasingly confident in their predictions about Bitcoin’s price movement. However, this can also lead to volatility, with even small price movements potentially triggering large-scale liquidations and larger price swings.
Indications of a Potential Pullback
Historically, when the leverage ratio spiked in 2021, it was followed by a market correction due to deleveraging. This is because a small price movement can lead to larger liquidations, resulting in a larger market drop. Therefore, an increase in the leverage ratio could indicate a potential market pullback towards more sustainable levels.
This possibility is supported by a declining NVT Golden Cross. While a golden cross is usually a bullish signal, a declining NVT Golden Cross may suggest that the current price surge is driven more by speculative investments than by strong network usage. This could mean that the asset is overvalued based on network usage.
This theory is further supported by a decrease in active addresses. Since peaking at 901k, active addresses have dropped to 835k. A decline in active addresses implies lower network usage and participation.
Over-leveraging can make the market more sensitive to price changes. If a large portion of the market is over-leveraged, even small price drops could trigger a wave of liquidations, leading to sharp sell-offs and high volatility. If this happens, Bitcoin’s price could register a pullback to find support at around $73,600.