Bitcoin's Leverage Ratio Drops: Institutions Accumulate, Bulls Charge Ahead

Bitcoin's Leverage Ratio Declines: What Traders Should Watch Out For

Over the past week, Bitcoin (BTC) has been trading sideways, with its price hovering around $7,052 after a 0.22% increase. Despite this, BTC has shown significant gains on weekly and monthly charts, rising by 2.81% and 2.89% respectively. This price pump has raised questions about the factors driving it, with Cryptoquant analyst Dan suggesting that higher institutional demand and long-term accumulation are key factors, citing a decreasing Leverage Ratio.

According to CryptoQuant, Bitcoin's Leverage Ratio has been declining since November 21. A decrease in the Leverage Ratio indicates that Open Interest (OI) is declining relative to available BTC on centralized exchanges. Historically, a lower Leverage Ratio reduces the risk of liquidation cascades, making price action more organic and less derivatives-driven. Additionally, the OI to market cap ratio has declined relative to prices, suggesting that gains on price charts are largely driven by spot demand rather than speculation. This trend is also reflected in the sell ratio, indicating that long positions are closing as the market cools off.

It is worth noting that CEX reserves have also experienced a sustained decline over this period. As BTC moves to Coinbase Prime and Bitcoin ETFs are bought, there is less BTC available to sell. The rise in flow to Coinbase suggests that large players, especially institutions, are actively accumulating. When these market behaviors come together, it implies that Bitcoin is currently experiencing a healthy market, with prices not driven by leverage, making future rallies more sustainable.

With spot demand surging and less leverage, while institutions are actively accumulating, it suggests that markets are experiencing strong bullish sentiment. For instance, Bitcoin's Coinbase premium index has remained positive throughout the past week, indicating positive sentiments among U.S. investors and increased demand by institutions. Historically, higher demand by institutions has played a critical role in driving prices higher. Additionally, Bitcoin's Fund Market Premium has surged to turn positive over the past day, implying that investors are bullish with longs paying shorts to hold their positions. This suggests that longs expect prices to rise in the near term. Finally, market participants are increasingly accumulating, with outflows outweighing inflows, as reflected in the exchange netflow dropping to -2.9k.