Bitcoin traders borrow more money to trade amid price drops – A big risk?

• The month so far has seen an uptick in BTC’s leverage ratio.
• The lack of corresponding price growth puts the coin at risk of further decline.

Bitcoin’s [BTC] estimated leverage ratio has risen in the past few days, even as its price has declined. This suggests that traders are becoming more leveraged or borrowing more money to trade the leading crypto asset, pseudonymous CryptoQuant analyst BQYoutube finds in a new report.

How much are 1,10,100 BTCs worth today?

BTC’s estimated leverage ratio tracks the average amount of borrowed funds (leverage) that traders use to trade the asset.

Typically, when BTC’s leverage ratio climbs, it could be taken as a sign of bullish sentiment, as it suggests that traders are confident that BTC’s value will continue to rise in price. 

However, it could also be a sign of risk-taking, as traders with high leverage are more vulnerable to liquidations if the market moves against them.

This spells “doom” for BTC

According to the CryptoQuant analyst, the uptick in BTC’s estimated leverage ratio has “been constantly building up with funding rates and exchange reserve along.”

At press time, the coin’s funding rate was 0.0124%. According to data tracked by Coinglass, it has increased by over 115% since 7 October. 

Source: Coinglass

However, with a decline in BTC’s value in the past few days, the surge in the amount of trading with borrowed money indicates a high level of greed among investors, especially those taking significant leveraged long positions.

This suggests that people might be betting on a price rebound, and they are doing so at any cost.

BQYoutube found further that the period under review has also been marked by low trading volume in the leading coin’s spot market.

This suggests there might not be a strong organic demand for the asset at its current price, as market participants interested in trading without leverage seldom do so. 

Source: CryptoQuant

According to the analyst, the best course of action would be to hold off on making strong buying decisions until the use of leverage and the reserves on exchanges cool down.

Read Bitcoin’s [BTC] Price Prediction 2023-2024

Open interest rally poses a similar risk

In addition to the growing estimated leverage ratio, funding rates, and exchange reserve, BTC’s futures & options open interest has also increased this month. Data sourced from Santiment put the coin’s open interest at $6.14 billion at press time, having risen by 9% since 1 October.

Source: Glassnode

While commenting on the impact of the rallying open interest, another pseudonymous analyst SignalQuant, noted:

“The current open interest has been increasing since Sept ’23 but is not at a level that would trigger a large-scale liquidation. However, it can reach the liquidation zone quickly at any time, so be aware of the volatility in that case.”