Key Points
- Ethereum’s leverage has increased to $10B in two months, potentially capping its upside potential.
- Historical trends suggest that high leverage could negatively impact Ethereum’s value.
Ethereum’s leverage has surged to $10B in just two months.
This increase, despite the first quarter typically being a bullish period for Ethereum, could expose the cryptocurrency to liquidation risks and limit its upside potential.
Impact of Leverage on Ethereum
Andrew Kang, Co-Founder of crypto VC firm Mechanism Capital, suggests that due to this leverage risk, Ethereum could remain within the $2K-$4K range for an extended period.
Before the US elections, Ethereum’s leverage, which is the borrowed asset for speculative trading, was at $9B. This figure jumped to over $19B in December.
Following this, a sharp price drop resulted in several positions being liquidated and brought Ethereum’s value down to around $3.1K.
Will Leverage Limit Ethereum’s Upside?
Kang believes that the ‘basis trade’ driven by CME Futures had little effect on the massive leverage as it was ‘delta-neutral’—each Ethereum bought in the spot market is shorted in the Futures market.
Instead, he attributes the excessive leverage to speculative traders.
Historical data supports Kang’s concerns. In most instances, when leverage Open Interest rose more than the price during a rally, a pullback and local top usually followed.
This was evident in early November and late December, which both resulted in escalated Ethereum liquidations.
On the 20th of December, Ethereum recorded over $300M of liquidations, with long positions dominating the losses.
Coinglass data, however, shows that the first quarter has always been Ethereum’s strongest performer, with an average gain of 81%.
In the past seven years, Ethereum only closed two first quarters in the red. If these historical trends repeat, Ethereum could witness significant gains in Q1 2025.
However, the potential liquidation risk could limit these expectations. As of the time of writing, Ethereum was back above $3K after a sharp drop to $2.9K following Monday’s bearish move.
