It’s an important time to manage risk. During the bear market, I believe it’s all about risk management.
In this article, we are looking at the Estimated Leverage Ratio.
In 2019 and the 1st half of 2020, the Estimated Leverage Ratio during the crypto winter was often lower than 1.0. When the markets started rallying towards the 2nd half of 2020 and onto the end of 2021 (the bull market), the estimated leverage ratio was moving between 1.2–2.0.
In the chart above, I had the dotted lines between 1.5–2.0 because 1.5 is the range I personally would like the market to fall back into.
Recently, in the past few months, we’ve seen leverage ratio hitting 3.0 and higher. A ratio of 3.0 is considered really high and very risky.
Since hitting 3.0, we’ve seen a flush out during the LUNA & UST crash, but this was followed by more leverage being taken. And this was then followed up again with another flush out during the Celsius, Blockfi, 3AC insolvent news. However, we are seeing leverage ratio moving up again and is now at a ratio of 3.1.
This tells us that the market is still taking a lot of risk in what I believe should be a risk off investment period.
I personally believe that institutions and retail are taking leverage positions to try to make up and cover their losses.
The question is… what will the market look like if we get a flush out all the way down to somewhere between 1.5 and 2.0? or even lower?
