In early February, Bitcoin’s price fell to its lowest level since Donald Trump’s election in November 2024. This drop is thought to have been triggered by excessive leverage in the market at the time. Recent on-chain data shows a major reduction in leverage within the Bitcoin derivatives market over the past week, lowering the risk of widespread liquidations.
In a new Quicktake post on CryptoQuant, trader CryptoOnchain highlighted a sharp deleveraging event on Binance, the world’s largest crypto exchange by volume. The key metric, the Estimated Leverage Ratio (ELR), has fallen significantly in recent weeks.
The ELR measures the ratio of open interest to an exchange’s reserves, reflecting the average leverage used by traders. A high ELR signals greater market risk, where even small price swings can trigger large liquidations and amplify price moves. In late January, the ELR reached a high of around 0.1980, pointing to an overheated, speculative market. After Bitcoin’s price decline, the ratio has cooled to approximately 0.1414—a drop of 28%.
CryptoOnchain notes that this decline indicates a major deleveraging has taken place, with the price drop forcing many overleveraged long positions to close. While the immediate price impact was harsh, clearing out excess leverage is ultimately healthy for the market. It deflates the “derivatives bubble,” creating a leaner market structure that is less prone to sudden, extreme volatility.
The analyst concludes that with the ELR returning to normal levels, the risk of further liquidation cascades has diminished. However, for Bitcoin to rebuild a bullish trend, it will need genuine buying pressure and organic demand from the spot market.
As of now, Bitcoin is trading around $67,950, up nearly 2% over the past day. Despite this daily gain, the cryptocurrency remains down more than 1% over the past week, according to CoinGecko data.
Frequently Asked Questions
FAQs Bitcoin Market Sees 28 Leverage Unwind What Comes Next
BeginnerLevel Questions
Q1 What is a leverage unwind in simple terms
A Its when many traders who borrowed money to bet on Bitcoins price are forced to sell their holdings to repay their loans usually because the price moved against them This creates a wave of selling pressure
Q2 Why is a 28 unwind a big deal
A It means a very large amount of borrowed moneybillions of dollars worthexited the market quickly Such a rapid exit can cause sharp price drops and high volatility as the market adjusts
Q3 What typically causes a leverage unwind
A A sudden significant drop in Bitcoins price When prices fall traders who borrowed to buy Bitcoin get liquidatedtheir positions are automatically sold off by exchanges to prevent further losses on the loans
Q4 Is this a sign that Bitcoin is crashing for good
A Not necessarily While severe leverage unwinds are a normal if painful part of volatile markets They can flush out excessive risk and sometimes create a more stable foundation for prices though further downside is possible
Q5 What should a regular investor do when this happens
A Avoid panic selling Understand that high volatility is expected Its a time for cautionconsider it a reminder never to invest more than you can afford to lose especially with borrowed funds
Advanced MarketFocused Questions
Q6 How does this unwind affect market structure going forward
A It reduces overall systemic risk by lowering the amount of leveraged overhang in the market This can decrease the likelihood of cascading liquidations in the near term but may also lead to reduced trading volume and liquidity
Q7 What are the key metrics to watch now
A Monitor
Funding Rates Are they neutral or negative This shows if leverage is rebuilding
Open Interest Is it stabilizing or still falling
Exchange Reserves Are coins moving off exchanges or onto them
Liquidation Levels Where are the next large clusters of leveraged positions