The Estimated Leverage Ratio (ESL) for Bitcoin experienced a 9% increase this month, climbing from a year-to-date low of 0.2218 on March 4 to 0.2417 by March 18. This uptick has returned ESL to levels not seen since late January, although it still falls short of the year-to-date high of 0.2709 observed on February 20.
ESL gauges the leverage utilized by derivatives traders by assessing the ratio of open interest to exchange reserves. Watching ESL helps indicate when investors are either amplifying or reducing their high-leverage risks in derivatives trading.
On February 20, Bitcoin’s price soared above $98,300, which was reflected in a very optimistic and leveraged ESL. However, as Bitcoin’s price dipped below $80,000, ESL reached its lowest point, indicating that traders were opting to close leveraged positions amid the downturn.
The subsequent rise in ESL through mid-March corresponds with the stabilization of Bitcoin’s price as it approached previous resistance levels. This trend suggests an ongoing market readiness to utilize leverage during price recoveries. Should Bitcoin maintain its position above recent support levels, ESL may continue to ascend, highlighting increasing risk exposure among traders.
Nevertheless, an uptick in ESL heightens the risks of liquidation if the market were to shift unexpectedly. A sharp decline in Bitcoin’s price could intensify market fluctuations due to rapid forced liquidations driven by a high ESL.
By observing the 7-day simple moving average (SMA) of ESL alongside price fluctuations, traders’ risk tolerance can be better understood. This month’s recovery indicates that, despite short-term volatility, derivatives traders remain keen to leverage opportunities presented by fluctuations in Bitcoin’s price.