Once Again, Excess Leverage Causes Major Dip: Here’s the Data
Ah, the pesky degens–never satisfied, always greedy. The crazy dip we saw early this morning, which wiped out most alt-coin gains in the past couple of weeks is clearly due to excess leverage in the market. Many believe leverage is a plague which is the only thing holding Bitcoin back, too. Bets against (shorts) Bitcoin rose to a record high last week on the CME, this was due to a “widening gap” between futures and spot markets prices. the CFTC reported “leveraged funds held a net short position of 31,000 contracts in the seven days to Oct. 19, marking an increase of 6,000 from the previous week.”
Basically Bitcoin looks incredible here on most metrics, but leverage traders have gone out of control.
We won't get sustainable price rises until that changes.
— Charles Edwards (@caprioleio) October 26, 2021
Futures were trading at a premium to the spot price, which gives traders an opportunity to arbitrage as the gap between the spot price and futures price converge. The CEO of CryptoQuant, Ki Young Ju stated: “Estimated leverage ratio is about to hit a year-high. It seems obvious that the market is over-leveraged now.” This dip was different, as alt-coins were holding strong through 3-5% BTC dips over the past couple months, but in a moment that reminded us of summer, alts in the top 100 saw 15% plunges across the board in seconds. As you can see below, this leverage ratio has indicated tops in the recent past.
The leverage ratio currently stands at 0.19, the highest since last November. It is even higher than where it was when we touched 64k back in the Spring. The rise of Shiba Inu, which has gone parabolic, was a warning sign that de-leveraging of the market was coming. Analysts at Delphi Digital predicted this on Monday stating: “Dog coins are mooning again, which has historically been a pretty good indication of an overheated market.” The frenzy is so wild, that Shiba overtook Bitcoin as the top traded coin in India this week, with nearly half a billion dollars in volume.
Currently, we are up to about $650-700 million in leveraged long liquidations on the day, as of press time. This type of flush is typically predictable and a necessary event, but as mentioned above, there are many that believe as long as leverage continue to run amuck, it will hold the market down. The trend is still bullish, of course, and Bitcoin is still set to have a fantastic Q4, but the speculation mania around coins like Shiba are not a good sign overall for the health of the market. It shows that still, fundamentals are being undervalued by the market.
Luckily, the on-chain data for Bitcoin points to “to slowdown in profit taking by long-term investors”, according to Glassnode. “Long-term holder spending behavior appears to be slowing down as conviction returns” Glassnode said. The vast majority of holders are still waiting for higher prices, which are expected in Q4. Also, a report by Coinshares shows that “a record $1.47 billion of new money flowing into digital asset investment products last week”, according to Yahoo. Luckily, alt-coins have recovered slightly today, and the overall bloodbath we saw in May is highly unlikely–assuming people are still aping into leverage on these dips is a bad sign, and there may be more volatility to the downside, so prepare accordingly.
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Text source: CryptosRus
