Although the crypto-verse is full of tales of quick profits told by intrepid visionaries, those trading crypto futures with leverage are now more cautious than ever, taking Bitcoin’s favorite mantra to the max and not investing more than they are willing to lose.

According to data from the metrics site CryptoQuant, the average leverage in Bitcoin futures trades is dropping every hour on the leading exchanges in the ecosystem. To explain this estimate, CryptoQuant developed an indicator called the Estimated Leverage Ratio, which is nothing more than the open interest of an exchange divided by the reserve deposited in the exchange.

It Could Go Up, It Could Go Down… But Don’t Bet On That

CryptoQuant revealed that leverage is going down on Binance, BitMEX, Bybit, Huobi and OKEx —which happen to control the majority of the trades in the whole ecosystem.

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The medium leverage is decreasing on all the major crypto exchanges: Image: CryptoQuant
The medium leverage is decreasing on all the major crypto exchanges: Image: CryptoQuant

The constant decrease in the average leverage could indicate caution in the middle of a price discovery phase, with traders willing to risk less and less when opening positions, considering the lack of historical references to sustain any prediction.

On the one hand, Bitcoin is in a bullish channel, setting ATH after ATH, so many could bet on the upside. After the halving, Bitcoin has grown faster and faster, without presenting a significant correction since the crash of March 2020.

On the other hand, many traders are waiting for a much feared correction. Everything that goes up comes down, and Bitcoin is no stranger to this reality. Traders who’ve opened positions will eventually want to cash out and take advantage of their realized profits. The timing could be brutal for those with large leveraged positions who are betting on a continuation of the bull market.

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Are Traders Willing to Put Their Money Where Their Mouths Are?

CryptoQuant believes the Estimate Leverage Ratio is a good way to measure the risk that traders are willing to take. For this reason, the statistic should reflect the general market sentiment:

ELR for a derivative exchange tells us how much leverage is used by users on average. This information measures traders’ sentiment whether they take a high risk or low risk. If the ELR value is high compared to the last couple of days, it indicates traders are quite confident in their positions. Funding data such as funding rates may help traders to build a robust trading strategy with this information.

In other words, in theory, the more optimistic traders are, the more leverage they are willing to use on a trade. Some analysts have already argued that it could be some sort of alternative to the Crypto Fear & Greed Index developed by Santiment, or even to the almost forgotten Bitcoin Misery Index proposed by Tom Lee.

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Those kind of indicators are not technical per se, and focus more on sentiment analysis. Traders use these kind of tools to determine how much the phsycological effect can influence the market trends.

The numbers provided by CryptoQuant try to offer an objective oversight of the markets, considering a simple premise regarding risks: When leverage is high, traders believe a trend is strong; when it is low, traders are more uncertain about what could happen.

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Futures Traders Are Now More Cautious Than Ever, CryptoQuant Reveals

by Steven Willis
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