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Can Leveraged Trades Cause Major Drops in Bitcoin? Critical Warning from CryptoQuant - Coin Bulletin
The Estimated Leverage Ratio (ELR) (ELR), which is used to measure risk appetite in the Bitcoin market, stands out as an important indicator that shows how much leverage investors are using.
According to CryptoQuant analysts, the relationship between Bitcoin price and leverage ratio carries the traces of market ups and downs.
According to data shared by CryptoQuant, the leverage ratio rapidly increased during the 2021 bull run. This indicated that investors were taking more risks by trusting the price increase. However, such high leveraged positions can cause significant liquidations during price drops and trigger sharp declines. Indeed, the leverage ratio also decreased during the bear market in 2022, demonstrating that investors were reducing their risks and entering a more cautious period in the market.
Leverage Usage Determines the Market Mood
According to CryptoQuant analysis, as the price of Bitcoin rises, market makers are pulling the price up, while individual investors start taking excessive risks in derivative markets. This situation indicates periods of excessive enthusiasm in the market. However, during such exuberant periods, a liquidity strategy usually develops against the market, and price declines become inevitable.
The dynamic between Bitcoin's leverage usage and price movements is seen as a critical indicator for long-term investors. CryptoQuant analysts emphasize that the increasing leverage ratio in the Bitcoin market also increases risks, and investors need to take this into account when determining their strategies.