A key indicator is raising concerns about excessive leverage in the Bitcoin market, potentially foreshadowing a sharp price drop. This indicator, the ratio between implied yield basis and options-induced volatility, has skyrocketed this year, suggesting a significant increase in speculative betting using borrowed funds.
According to experts, such a large discrepancy between expected returns and underlying volatility often signifies overheated markets vulnerable to “leverage washout.” This scenario occurs when traders are forced to close leveraged positions due to sudden price swings, leading to a domino effect of further selling and potentially drastic price drops.
While Bitcoin has seen a notable surge this year, primarily fueled by the recent launch of US-based Bitcoin exchange-traded funds (ETFs), the indicator suggests a potential shift in sentiment. Despite the initial excitement surrounding the ETFs, inflows have slowed down recently, raising questions about the market’s sustainability.
Historical patterns also raise concerns. Similar spikes in the indicator ratio in late 2023 were followed by increased volatility and price fluctuations. With Bitcoin currently trading within a narrow range, a breakout in either direction could trigger significant movements.
Experts caution that while the indicator suggests potential risks, it doesn’t guarantee a specific outcome. However, it highlights the importance of exercising caution and managing risk exposure during periods of heightened speculation.
This information is not legal advice. Do your own research before making any decisions. Only invest what you can afford to lose and seek independent financial advice if needed. Understand the risks involved before purchasing any cryptoasset