- Bitcoin’s most recent rally not driven by leverage
- Lack of leverage in Bitcoin’s recent rally could suggest that investors don’t have strong expectations of a sustained push over US$46,000 or could be a function of a pullback in leverage options and traders still nursing losses from May’s unwinding of margin
As Bitcoin goes, even the most diamond of hands can turn to paper in the face of leverage.
In two bouts of extreme volatility in May and June, traders who had placed highly-leveraged bullish bets on Bitcoin’s relentless ascent were whipsawed and stopped out by a sudden selloff that rippled through the cryptosphere and caused a cascade of liquidations.
Those episodes saw Bitcoin plunge to as low as US$28,000, from a high of around US$64,000 in April.
But as greater regulatory pressure has been brought to bear on the cryptocurrency space, exchanges like Binance and FTX have voluntarily started to dial back on the leverage that they are willing to make available to traders, bringing juiced up bets to just 20 times.
Binance has even gone as far as to shutter its lucrative cryptocurrency operation in Europe, which at one point was a magnet for traders wanting to bet big on cryptocurrency price swings with copious amounts of leverage.
Given how many of the world’s biggest cryptocurrency exchanges by trading volume are unregulated, some made leverage as high as 100 times available on their platforms, but a regulatory dragnet has put pressure on them to curb the appetite of traders’ most excessive speculative urges.
And as Bitcoin rallied last month, one thing was noticeably absent from the mix – leverage, with the spread between Bitcoin futures and spot prices shrinking to its lowest levels relative to February’s speculative surge.
Investors are betting on Bitcoin, but they’ve shunned the leveraged long positions that have helped fuel previous rallies, suggesting that they either don’t believe the recent push over US$46,000 is a genuine breakthrough, or the leverage is yet to come.
Over the past several weeks, Bitcoin has been steadily climbing higher, breaking key technical barriers that some have suggested could precipitate a further rally.
But whether that leverage will come is another story altogether.
Many traders are still nursing losses from having their accounts liquidated in May, with an estimated US$8.6 billion evaporated from margin calls and exchanges forcibly wiping out leveraged positions.
But if that leverage should come, a highly speculative push to 6-digit Bitcoin is a possibility.
