Data shows that metrics related to Ethereum derivatives have been rising recently, indicating that the price is at risk of going through a volatile storm.
Ethereum’s open interest and leverage have been rising recently
In CryptoQuant Quicktake mailan analyst discussed the trend in Ethereum derivatives indicators. The metrics in question are open interest and estimated leverage ratio.
First, the open interest tracks the total amount of ETH-related contracts currently open on all derivatives platforms. The scale naturally takes into account both long and short positions.
When the value of this measure rises, it means that investors are opening new positions in the market. This trend indicates that interest in currency derivatives trading is on the rise.
On the other hand, an indicator recording a decline means that positions in the market are declining. This may be because investors intentionally shut them down, or because exchanges forcefully liquidate them.
Now, here’s a chart showing the trend in open interest in Ethereum over the past few years:
The value of the metric appears to have been shooting up in recent days | Source: CryptoQuant
The chart above shows that Ethereum’s open interest has seen rapid growth recently. It surpassed the previous all-time high (ATH) to set a new record of over $13 billion.
When considering the time frame of the past four months, the index has risen by more than 40%, indicating an explosion in speculative interest around the cryptocurrency.
However, this development may not be the most correct, as the trend in the second relevant indicator, the estimated leverage ratio, suggests. This metric measures the ratio between open interest and derivatives exchange reserves.
Naturally, the derivatives exchange reserve is the total amount of cryptocurrency held in wallets linked to all central derivatives exchanges.
The estimated leverage ratio tells us how much leverage or leverage an average derivatives user is currently choosing in the Ethereum market.
Below is a chart of this indicator.
Looks like the value of the metric has been heading up over the last few weeks | Source: CryptoQuant
From the chart, it appears that Ethereum’s estimated leverage ratio has increased recently. This means that the increase in open interest was faster than the increase in the derivatives exchange reserve.
Investors are now sitting on an all-time high level of leverage (ATH), which could be a bad sign for ETH because it means that any future volatility could cause over-leveraged positions to decline and cause a mass liquidation event called a squeeze.
The quantitative analyst noted that Ethereum’s funding price, which is the ratio between long and short positions, is positive at the moment, suggesting that if a squeeze occurs soon, it will likely involve the upside of the market.
Ethereum price
At the time of writing, Ethereum’s price is trading around $3,000, down about 7% over the past week.
The price of the coin seems to have been consolidating sideways recently | Source: ETHUSDT on TradingView
Featured image by Dall-E, CryptoQuant.com, chart from TradingView.com