Rising Bitcoin Leverage Keeps Traders on Edge as Volatility Drops

Rising leverage in bitcoin (BTC) derivates combined with the lowest levels of volatility in more than a year is currently keeping traders on edge for a potentially explosive move in either direction.

The signal from the derivatives market comes after open interest in bitcoin futures across exchanges reached a level not seen since November, per a report from crypto researcher Arcane Research.

According to them, it is the “boring” market in December that has made leverage more attractive among traders, who generally rely on volatility in order to generate profits.

The total open interest in bitcoin perpetual futures is back at highs not seen since November, the report said, adding that leverage in one of the stablecoin-margined bitcoin futures contracts on Binance has doubled since December 5.

The rising leverage and reduced volatility over the past month mean that the market “seems ripe for a move,” Arcane’s report further said, noting that a bullish short squeeze is “a plausible scenario” because of “neutral to slightly below neutral” funding rates in the bitcoin futures market.

However, the researchers warned that the expected volatility burst could also come as a downside move given the current technical set-up of the bitcoin chart. “ longs may bleed if we see a push below the current tight consolidation range,” the report said.

Meanwhile, according to a private note by analysts at Bespoke Investment Group, lower volatility could be “the most interesting outcome for price action” in the crypto market in 2022, Bloomberg reported on Tuesday.

Commenting in the same article, TD Ameritrade Chief Market Strategist JJ Kinahan said that high volatility has been a problem for investors looking at crypto, explaining that it is difficult to use it as “a trusted long-term financial play if it has incredible volatility.”

“It just makes people too nervous or too nervous to even be involved, so the more stability a product like that starts to see, the wider the audience it attracts,” the market strategist was quoted as saying.