In early February, Bitcoin’s value plummeted to its lowest point since the election of US President Donald Trump in November 2024. This decline is thought to have been triggered by excessive leverage within the $BTC market at that time. Recent on-chain analytics indicate a significant liquidation event in the Bitcoin derivatives sector over the past week.
$BTC Market Faces Lower Liquidation Risks
A recent update from CryptoQuant highlighted a substantial liquidation wave in Bitcoin derivatives trading on Binance, which is recognized as the largest cryptocurrency exchange by trading volume. The key metric under consideration is the Estimated Leverage Ratio (ELR), which has experienced a notable decrease recently.
The Estimated Leverage Ratio serves as an on-chain indicator that assesses the relationship between open interest and an exchange’s reserves (in this case, Binance). It reflects how much leverage traders are utilizing within a specific market or platform. Typically, a high ELR indicates increased market risk, suggesting that minor price fluctuations could lead to significant liquidations and subsequent price shifts.
As reported by NewsBTC at the end of January, ELR was alarmingly high at approximately 0.1980, signifying an overheated and speculative environment. Following Bitcoin’s price drop, this metric has cooled down considerably to around 0.1414.
CryptoOnchain noted that this 28% reduction in ELR underscores a transformation in market dynamics. The analyst indicated that such a decline points towards severe deleveraging activity where many overleveraged long positions were closed due to falling prices.
CryptoOnchain further stated:
The short-term price movements may have been harsh; however, eliminating excess leverage is fundamentally beneficial for market health. It clears out any “derivatives bubble” and results in a more stable structure less prone to extreme volatility spikes.
The crypto expert concluded that with ELR returning to normal levels, there’s now diminished risk for additional liquidation cascades; nevertheless, for Bitcoin’s market structure to regain bullish momentum and establish sustainable growth trends again requires genuine buying pressure from spot markets.
An Overview of Bitcoin Prices
Currently priced around $67,950, Bitcoin has seen nearly a 2% increase over the last day according to CoinGecko data; however it remains down more than 1% weekly overall.
Featured image from iStock; chart sourced from TradingView