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- The Estimated Leverage Ratio (ELR) metric in Bitcoin
- A decrease in volatility and speculation is expected in the Bitcoin market.
What does the decrease in the Estimated Leverage Ratio metric in Bitcoin mean and how does it affect volatility?
On-Chain Data Shows Decrease in Bitcoin Speculation
A leverage measure in the Bitcoin market has dropped to its lowest level since the end of 2021, indicating that the volatility that triggers speculators is being increasingly removed from the market, which means that the world’s largest cryptocurrency by market value, Bitcoin, could be calmer.
The “Estimated Leverage Ratio” (ELR) data has dropped to its lowest level since December 2021, at 0.195.
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Estimated Leverage Ratio (ELR)
This is a drop from a peak of 0.4 just before the collapse of the cryptocurrency exchange FTX in November, which was the catalyst for Bitcoin reaching its lowest levels in the bear market of 2022 at $15,000.
ELR data calculates the dollar value of open permanent Bitcoin futures positions divided by the number of Bitcoins held by derivative exchanges (where traders open these permanent Bitcoin futures positions).
A lower number means that traders on derivative exchanges are opening less leveraged positions in proportion to the number of BTC they hold on the exchange, which essentially means that there is less speculation in the market.
Low Leverage Could Create Bullish Momentum for Bitcoin!
As can be seen above, the relationship between ELR and BTC price is weak. When Bitcoin reached record levels in late 2021, ELR was at current levels before peaking when the Bitcoin price was around $20,000.
However, a lower ELR could still be bullish for Bitcoin price, as excessive leverage in the market can trigger volatility (due to positions being liquidated). Higher volatility can deter investors. A lower volatility profile in the future could be a key factor in attracting new individual and institutional investors.
The drop in ELR came after wild liquidation-induced fluctuations in Bitcoin price on Wednesday. According to Bitcoin option market pricing, lower volatility in the future seems to be what investors are expecting.
Implied volatility values near the At-The-Money (ATM) Strike Price for Bitcoin options with 7, 30, 90, and 180-day maturities are in the 45-55% range, which is close to historical lows.
Deribit’s Bitcoin Volatility Index (DVOL) is also near historical lows at current levels around 55.
Alternative leverage measures in the Bitcoin market are also decreasing.
The ratio of the dollar value of open positions in Bitcoin futures markets to the market value of Bitcoin is around 0.0176.
This indicates that there were approximately $9.7 billion in open positions in Bitcoin futures on Wednesday.
In November 2022, when Bitcoin’s market value was just over $393 billion and open positions were around $11.56 billion, this ratio was much higher at around 0.03.
The withdrawal of speculators has generally been consistent with the market finding a low level and then recovering, followed by FOMO (fear of missing out) attracting a new wave of speculators.
Therefore, on-chain analysts such as the Realized HODL Ratio prefer to monitor metrics such as the balance of BTC holdings in 1-week and 1-2 year old coins.