Bitcoin is poised to break out of the tightest range in 2 years

Based on one gauge, leverage ratios for the two largest tokens by market capitalization – Bitcoin and Ether – are at their highest on record, even with prices of both down more than 50% this year. It is calculated by taking the amount of open interest for perpetual swaps and dividing it by the amount of coins held in reserve on exchanges, according to blockchain data website CryptoQuant.

“People think the market has stabilized and are willing to take bigger speculative positions,” said Darius Sit, co-founder of Singapore-based crypto investment fund QCP Capital, who pointed out that traders who see so-called tail risk – or the chance of a loss occurring at due to a rare event — “being priced out.”

Crypto traders tend to favor perpetual contracts – which, unlike traditional calendar futures, do not expire – in part because it allows them to keep highly leveraged positions in place.

Bitcoin, which accounts for about 40% of the estimated market value of all cryptocurrencies, last week traded within a range of about 5.4%, the narrowest since October 2020, data compiled by Bloomberg show. The lull two years ago was followed by a month-long price rally that eventually pushed Bitcoin to an all-time high in April 2021.

Cryptocurrencies have stagnated since June, when prices fell in the wake of the collapse of the Terra stablecoin ecosystem, the demise of hedge fund Three Arrows Capital and the bankruptcies of Voyager Digital and Celsius Network.

Bitcoin advanced 0.8% to $19,900 at 7:07 a.m. in New York on Tuesday, while Ether was up 4.3% to $1,666.

Despite recent hawkish comments from the Federal Reserve that inflation and the economic slowdown continue to weigh on riskier assets, including crypto, more traders appear to be betting on bullish leveraged bets.

Overall, the biggest catalyst for the growing influence is likely to be the long-awaited upgrade of the Ethereum blockchain later this month. The most commercially important network is set to move from its current system of using miners to a more energy efficient network using coins. Data collected by blockchain analytics firm Kaiko shows that perpetual swap contracts’ open interest denominated in Ether hit a record high in late August.

“As we get closer to the merger, ETH leverage will continue to build,” said Shiliang Tang, chief investment officer at crypto-asset investment firm LedgerPrime.

At the same time, funding rates for both Bitcoin and Ether perpetuals have turned negative in recent weeks, according to data website Skew. Exchanges use the so-called funding rate – or trading cost – to link the contracts to their underlying spot price. When the rate is positive, those with long positions pay interest to investors who are short, and vice versa.

Kaiko estimated that traders are biased to the downside because they are either betting on a failed or delayed transition of Ethereum to Proof of Stake or securing long-term Ether positions ahead of the merger.

“The growth of leverage with more bears could result in a short squeeze, as overleveraged bears are liquidated if prices go up,” said Andrew Tu, head of growth for crypto algorithm trading firm Efficient Frontier, which takes neutral positions in the trade.

Enter your comment
First article