Bitcoin futures show renewed confidence amid rising prices

Prior to this, Bitcoin broke the $27,000 mark this week, thanks to reports of Grayscale's victory over the SEC during the trial.

From now on, this decision is a significant victory for Grayscale and has important implications for the upcoming Bitcoin ETF spot applications. The outcome of the court in this case may affect the outcome of consideration of several spot applications for the purchase of bitcoin-ETF, filed earlier this year.

Grayscale's victory appears to have bolstered the confidence of bitcoin traders. This process of renewed confidence can be observed in the futures market, where on-chain indicators have shown a clear increase in leverage.

The leverage ratio (ELR) is an important metric that gives an indication of the level of risk traders are willing to take on. It consists of the ratio of open interest in bitcoin futures contracts and the balance of the exchange in this direction. Ranking by ELR growth suggests that traders are taking advantage of their positions more and more. This indicates an increased appetite for risk.

On August 30, the Estimated Leverage Ratio (ELR) jumped from 0.22 to 1 on the 25th after Bitcoin jumped from $26,100 per unit to $27,700.

Figure showing the calculated leverage ratio (ELR) for bitcoin futures from August 25 to 31, 2023 from Glassnode.

So, on the one hand, the growth of ELR confirms that traders are becoming more and more optimistic. Due to this, for each bitcoin that is on the exchange and traded, a certain surge of traded futures contracts is created. This trend indicates that traders, driven by positive market sentiment, are willing to take on more risks in anticipation of good returns.

But a broader perspective reveals another narrative. The current ELR reflects the levels seen in early August. In mid-August, the market experienced a strong drop in ELR, amounting to 0.28 to 1., which is more than 2 times lower than the level of the previous month. This drop happened in tandem with the fall in the price of bitcoin, which dropped as low as $27,000.

Shown is a chart showing the estimated leverage ratio (ELR) for Bitcoin futures from July 1 to August 31, 2023. Source: Glassnode)

However, current ELR levels may hint at a market risk profile similar to early August. This means that the market is still vulnerable to price fluctuations like those seen earlier this month. It is important to know that Bitcoin's rise below $28,000 in mid-August triggered a series of liquidations. The market filled this forced pause with volatility, and the situation with the closing of positions on borrowed funds also added to it.

Chart showing all the liquidation times for bitcoin futures in August 2023 (source: Glassnode)

While the recent surge in Bitcoin prices and the corresponding rise in the ELR indicate bullish sentiment among traders, the market should be cautious. The main risk profile of the market, showing the beginning of August, can still experience quite significant volatility.