Crypto Market Reclaims $3 Trillion as Bitcoin Rally Fuels Leverage
The extraordinary rebound in Bitcoin has caused digital assets to reclaim $3 trillion in market value, a level not seen since January. The potential of rapid price volatility is heightened, however, because traders are increasingly using leveraged bets in perpetual futures. After last month’s announcement by the US Treasury about increasing buybacks of long-dated bonds, the market value jumped by more than $740 billion, according to the available statistics. Gains are increasing the leverage. Data shows that open interest in perpetual futures across tokens has reached a new high of about $160 billion, the highest level since late October of last year. “If open interest and funding keep accelerating faster than spot demand, the risk of a leverage-driven pullback increases,” said Ryan Lee. “Macro has not stopped mattering; for now, Bitcoin-specific demand has been strong enough to outweigh those pressures.” On Monday, over $920 million in bearish positions were liquidated as prices experienced a significant surge.
As traders quickly repurchase assets to cover lost bets, further upward pressure on prices could be applied if short positions are unwound. The fact that open interest has persisted in rising suggests that new leveraged positions are being formed in the market alongside the liquidation of short holdings. “A squeeze normally destroys open interest,” said Rachael Lucas. “This one didn’t, which means positions are being replaced immediately. Traders are chasing this, not de-risking into it. That’s why the next 5% in either direction will be faster than people expect.” After soaring over 8% to $87,381 on Monday-its highest level since late January-Bitcoin dipped to a low of $85,093 on Tuesday. The vast majority of bitcoin trade volume is in perpetual futures, which are contracts without a set expiration date. These contracts are an important indication of speculative posture.
The fact that short bets are being closed and open interest (the number of contracts available) is going up suggests that the recent rebound is due to more than just traders selling off their negative positions and reducing their leverage. New exposure is gradually replacing them, which might cause leveraged longs to reverse or short liquidations to cascade in response to a change in price. “The main thing to watch is leverage running ahead of spot,” said Caleb Lin. “Rising perp open interest is healthy when spot is coming with it. When it builds faster, the market becomes reflexive: a modest reversal triggers long liquidations, which push prices lower and force further deleveraging.” That’s the same process that, according to Lin, forced shorts to exit when prices rose past $83,000. “Long-side leverage building against thin spot sets up the same conditions in reverse.”
Coincident with the most recent development, institutional investors are showing more interest in Bitcoin and a few smaller tokens. Net inflows of $999 million were recorded by US spot Bitcoin exchange-traded funds on Monday, the biggest single day of inflows since the currency reached its all-time high of almost $126,000 on October 6. After suffering heavy losses at the start of the week, the exchange-traded funds saw a recovery on Thursday and Friday, receiving $593 million. A number of altcoins have joined the surge, with privacy-focused Zcash seeing a meteoric rise and the native token of the Hyperliquid blockchain, HYPE, hitting an all-time high. The rally’s longevity is still a question mark for traders. “Short squeezes produce price, they don’t produce holders,” Lucas said. “I will be watching whether spot demand replaces the forced covering over the next week.”
