While a bull rally correction has been anticipated, Bitcoin’s drop from its all-time high of $99,600 to $92,000 managed to wipe out a good chunk of optimism from the market. The pace of Bitcoin’s growth since the US presidential elections in November led many to expect BTC to break through the coveted $100,000 mark relatively quickly and enter into a full-blown bull market by year’s end.
Previous CryptoSlate research analyzed futures funding rates, exploring how the cost of maintaining positions reflects market sentiment. Consistently high volume-weighted and open interest-weighted funding rates mirrored the market’s optimism and showed that the rally was mostly driven by derivatives trading.
However, it also showed a significant danger of the market overheating, as elevated funding rates signal excessive leverage that creates a fragile market environment. Periods of high funding rates often precede sharp corrections, as overextended traders are forced to exit positions.
The extent of this leverage can be seen through the estimated leverage ratio (ELR). ELR is calculated by dividing the open interest in derivatives markets by Bitcoin’s total exchange reserves. A rising ELR indicates that more leverage is utilized relative to the available Bitcoin, signaling heightened speculation.
The ELR also provides a window into how aggressive traders are in taking leveraged positions and how much of the market is driven by derivatives rather than spot activity. Since the beginning of September, the ELR has grown significantly, following Bitcoin’s rally from $65,000 to $98,000. This shows that traders were riding the bullish momentum and deploying leverage along the way, amplifying the upward price action we’ve seen in the past three months.
However, in the last few days of November, the ELR began to decline even as Bitcoin’s price remained near or at its all-time high. This divergence is particularly important when analyzing the market, as it indicates a phase of deleveraging or risk reduction.
Traders may have started unwinding their leveraged positions to secure profits or avoid liquidation risk in an increasingly volatile environment. The decline in ELR indicates that leveraged activity was scaling back, reducing the speculative pressure that had driven the rally.
Given the market’s current sensitivity, this deleveraging couldn’t go unnoticed, pushing BTC…
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