Is Bitcoin On The Verge Of A Colossal Move?

Is Bitcoin On The Verge Of A Colossal Move?
Jonathan Hobbs, CFA

over 1 year ago2 mins

Bitcoin’s been behaving like a stablecoin lately – its price (gray line) is calmly chilling at around $19,000 a coin and has barely budged in weeks. But now is not the time to get complacent on the OG crypto: a big move is likely brewing.

This chart shows bitcoin’s price as well as its leverage ratio (purple line), which is an estimate of the average amount of leverage currently being used by bitcoin derivatives traders. That’s tallied up by taking the amount of open bitcoin derivative contracts (the open interest), and then dividing it by the total amount of bitcoin held on the exchanges where those derivatives are being traded. The leverage ratio is now higher than ever, meaning your average bitcoin derivatives trader is leveraged to the hilt. So when bitcoin eventually breaks out of its boring range (and it will), you can expect to see a massive cascade of liquidations, where highly leveraged traders are compelled to exit their positions as the price moves against them. It’ll be like throwing gasoline on top of a small fire.

Of course, the move could go either way. See, the ratio includes both long and short positions. And while it doesn't show the split between them, you can be sure there’s a ton of leverage on both sides. So if the price moves up and starts to liquidate the shorts, those traders will be forced to buy bitcoin back at higher prices to close out their positions, which could make for an explosive rally. Of course, the opposite is true if the longs get liquidated – they’d become forced sellers and drive the price deeper down into the crypto abyss. The key US inflation report (CPI) comes out on Thursday – don’t be surprised if it's the match that sparks this whole thing off.

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