In the context of crypto trading, leverage refers to the use of the exchange's borrowed funds to make trades for the prospect of greater profits using instruments like perpetual futures. According to Arcane, the volume of open positions in perpetual Bitcoin futures was approaching 500,000 BTC this week, indicating that the cryptocurrency's volatility and leverage trends are diverging rapidly in the market.

Overall, the cryptocurrency market looks relatively good today – especially when you consider yesterday’s collapse following the announcement of US inflation data. Not only have the coins returned to their pre-collapse levels, but they have also issued additional gains.

Here are the hourly charts of Bitcoin and Etherium, showing both the collapse of the coins and their further recovery.

Bitcoin and Etherium hourly charts

What’s next for Bitcoin?

In the current situation, the likelihood of a sharp spike in the Bitcoin chart is seriously increasing. Why so? The fact is that a relatively small capital of “whales” or large bidders is now enough for a noticeable price movement, the expert believes. It will cause liquidation of positions of one of the parties of the transaction, i.e. sellers or buyers. And because traders have borrowed a lot of capital from exchanges, they will be liquidated faster – and this will cause a cascade of liquidations, i.e. forced closing of a huge number of positions by exchanges in one direction or another.

As a reminder, liquidation is a mechanism that prevents a trading platform from going negative if a trader who has borrowed money from it has started to incur losses. To get such a loan, he needs to deposit his cryptocurrencies or margin. In liquidation, the exchange takes the margin, so margin trading can make big profits as well as big losses.

Discrepancy in BTC price and volume of open positions

According to Cointelegraph’s sources, the increase in leverage only indicates that a spike in volatility is coming, but does not give insight into the direction of Bitcoin’s price spike. Lunde mentions this in the following quote.

I view the current volume of open positions in perpetual futures as well in excess of any market stability levels, the opaqueness of market signals prevents me from having any opinion on the direction of the cryptocurrency price.

Buying cryptocurrency

Regardless of which local trend comes in the short to medium term, analyst Arcane Research remains optimistic about Bitcoin for the long term. Lunde expressed confidence that next year will bring “clarity on cryptocurrency regulation” in the US, as well as a more stable Fed interest rate regime and inflation.

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It is the regulation of the crypto market – or rather its lack of regulation – that is now the main obstacle for the world’s big banks to invest in crypto. That was the statement made by Coin Metrics CEO Tim Rice during a recent interview. Here’s his rejoinder on the subject, cited by Decrypt.

There are more risk-averse companies emerging in the traditional financial sector that are coming into the crypto industry. They are more concerned with figuring out how to mitigate their risks.

The lack of clear regulation of crypto leaves clients of large financial firms and banks unprotected in the event of major market turbulence or even hacker attacks. This is a difficult environment for professionals to work in, and investing in digital assets is not at its peak right now. So there are plenty of reasons for financiers to avoid cryptocurrencies rather than invest in them.

There are exceptions to the rule - MicroStrategy, for example. It currently ranks first in Bitcoin reserves among all publicly traded companies with its 130,000 BTC. However, such high risks for MicroStrategy are most likely due to the tough stance of the company's representative Michael Saylor, whose commitment to BTC sometimes borders on fanaticism. Tesla, which announced a large bitcoin purchase last year, has by now gotten rid of most of the cryptocurrency.

Top 5 public companies in terms of crypto holdings

In other words, we just have to wait for the favour of financial regulators – a factor that will greatly accelerate the adoption of crypto in the future.

We believe that regulatory transparency by major governments will really benefit the digital asset industry. However, in some countries, crypto is now viewed through the prism of a regulatory framework that predates the launch of the Bitcoin network. It is therefore impossible to take such an approach seriously. One would like to believe that the current bearish trend will be used by government officials for this purpose as well.

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