Have you noticed the recent, sudden swings in Bitcoin’s price?
You might think it comes from market makers or whales trying to pump or dump. While that’s always possible, you have to look at one other factor: leverage.
With sufficient leverage, a slight shift in the order books can have a disproportionately large impact on price.
Quite a lot, methinks
I like to look at the estimated leverage ratio, which tells you how much traders are betting with borrowed funds relative to the amount of Bitcoins available to settle their bets.
The higher this metric goes, the more strongly a small price move will trigger liquidations that pump or dump the market.
On this metric, leverage is at its highest since the start of the bull market in 2022.
With so much leverage relative to supply—especially with the relatively low trading volume we’ve seen on most days since May—you don’t need big liquidations to swing prices.
But the size!
Yes, we can always get a big short squeeze like the one that pushed us to $120k earlier this month. One of the biggest liquidation events ever. Pumped Bitcoin’s price up 7% in a day.
I’m talking about the smaller ones that move the market so suddenly and violently, you can’t help but react. You get worked up but the moves don’t necessarily change anything.
As such, until circumstances change, don’t be surprised if we get more of these sudden swings—both to the upside and downside.
You may feel like you need to worry or get excited. More likely than not, it’s just traders getting zapped, not any fundamental shift in circumstances or expectations.
I talk about this and other topics in the
