After soaring towards $100,000 a few days into the new year, Bitcoin’s price looks set to end January, in stark contrast to how it started the month. On Thursday, January 29, the flagship cryptocurrency fell to a multi-month low of around $81,500, with overall market sentiment worsening in recent weeks.
At the start of the weekend, Bitcoin’s price cooled slightly, recovering above the $93,000 level on Friday, January 30. Interestingly, the latest on-chain data suggests that the market leader is only on the cusp of another violent price move.
BTC is preparing for a violent liquidation cascade
In a Quicktake post on the CryptoQuant platform, CryptoOnchain shared insight into the current state of the Bitcoin price on-chain. According to market quant, Bitcoin Estimated Leverage Ratio (ELR) witnessed a notable rebound on Binance, the world’s largest crypto exchange, as the price underwent its latest correction.
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For context, estimated leverage ratio is an on-chain metric that tracks the ratio of open interest to the reserve of an exchange (in this case, Binance). This metric measures the average amount of leverage used by the traders on a given market or exchange.
A higher ELR indicates higher market risk, indicating that small price movements can lead to significant liquidations. According to data from CryptoQuant, CryptoOnchain highlighted that the Bitcoin Estimated Leverage Ratio recently spiked to a critical level of 0.188 as the price fell to around $81,500, indicating that the Open Interest is exceptionally high relative to the exchange’s reserves.
Furthermore, CryptoOnchain shared that the difference between rising leverage and falling prices is a classic ‘bearish divergence’ signal in the derivatives market. “It indicates that despite the price weakness, traders are aggressively increasing their leveraged positions,” the on-chain expert added.
Moreover, CryptoOnchain revealed that when the market becomes heavily overloaded during a price correction, it implies that traders either buy the dip with high leverage or increasingly take short positions. The market quant said this setup usually precedes a “violent liquidation cascade.”
Overall, CryptoOnchain concluded that the market is currently in a zone of high tension, with the combination of peak leverage and low prices indicating that a “squeeze” is imminent. However, the analyst clarified that the direction of the next violent move depends on the dominant side (bulls or bears) of the market.
Bitcoin price at a glance
At the time of writing, the price of BTC is around $84,200, reflecting an increase of almost 1% in the past 24 hours.
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Featured image from iStock, chart from TradingView