Hi DystoFam, and welcome back to another article by your trusty scribe, Wolfe. The markets have been rather boring recently as expected, so I haven’t had too much to write about. I thought it best to use this time to educate you guys on one of the most important indicators of a correction in crypto, Leverage.
As always I will do a little market update before we start.
I spoke about this in our #crypto-news and #crypto-analysis sections, but they seem to be having issues :( so I will re-iterate here:
First, we need to understand what Total1, Total2, and 3 are.
- Total1 is the total market cap of ALL cryptocurrencies.
- Total2 is the total market cap of all cryptocurrencies EXCLUDING Bitcoin.
- Total3 is the total market cap of all crypto EXCLUDING BTC & ETH
The reason this is so important, is that all of these markets should correlate together. (Correlate means move together). So when total1 makes a new high, we should expect 2 and 3 to do the same.
When we see a disparity in this, it is called divergence. It usually occurs when 1 asset is being bought up so much more heavily than the other that it breaks the correlation.
Total2 was diverging from Total until recently (Which means ETH was being bought up much more than BTC). However these 2 markets have returned to correlation.
Total3 is still refusing to correlate, meaning people are buying yummy altcoins. This follows the crypto flow of money thesis which is:
Cash dollar dollar -> BTC -> ETH -> Alts
You can see the charts below to see for yourself this divergence.
We can expect alts to do some magic soon, but we need BTC and ETH to be healthy in their price action for this to happen. I’ve predicted where I think the last sell-off will occur before bullish movement on BTC.
Once this last down-move happens, and the leverage squeeze is made efficient in its pricing, we will see BTC and ETH get on a rocket ship again.
Get Rekt Leverage Trader
If any of you are new here, the recent flash-crash in the cryptocurrency markets was caused by excessive leverage.
(Lots of noob traders borrowing money to trade with, the market has to rek them every now and then).
Now we are at a slightly more healthy point in our leverage chart.
This leverage squeeze left a massive “wick”, which is where price has pushed downwards but rejected hard, leaving a long thin line below the body of the candle.
The market likes to move “efficiently”. This is the basis of my trading.
Something like a big wick in the market is “inefficient”, price will come down and fill it in.
This is why we can expect some further downside from BTC, it also allows us to shake a little bit more leverage out of the market.
Leverage is still so high?
I’ve seen a lot of people comment on the fact that even after the leverage shakeout, we are still at one of the highest points of leverage in recent years.
Leverage is more than just noobs borrowing money on exchanges. There are some other factors that you have to understand with leverage.
Many of you have heard of Bitcoin ETFs. An ETF is an “Exchange traded fund”, you can think of it like an index that exists to track an asset, for example, we have SPY, which is what you use when you want to leverage trade the S&P 500.
Why is this useful?
An ETF allows you to leverage trade much more easily, and more exchanges are willing to offer the ETF than the asset itself. Every time that a contract is taken out on the Bitcoin ETF, due to the nature of ETFs, it counts as a leverage trade.
As more ETFs in crypto are created, the leverage will inherently increase. It’s important to understand that leverage from ETFs is usually small with huge amounts of capital behind it.
TLDR — Leverage on ETFs = pro traders, they don’t get rekt.
This explains why the leverage on BTC is higher than it has ever been before, and as long as we have ETFs, BTC leverage will remain high.
How do I tell when we are over-leveraged?
Just because the leverage is going to be higher at a base level, doesn’t mean we can’t easily tell when we are over-leveraged.
An easy method I like to use, is divergence.
If we make a higher-low in price, and a higher-high in divergence, you can safely assume that we are over-leveraged.
This is as a divergence between Leverage and actual price means that the leverage market is outperforming the actual Bitcoin market (in volume). This is an extremely easy indicator that the leverage market has too much volume.
The leverage chart always requires your attention, so we can predict leverage squeezes like this. The good thing about a leverage squeeze is that it is usually followed by a huge period of bullish price action.
I like to think of a leverage squeeze as the market “shaking off” all the leeches before making its move upwards, hence why these styles of movement are often called a “shakeout”.
Thank you for reading DystoFam ❤. I hope you all enjoyed and absorbed some useful information.
The markets have been very boring, and will likely go sideways/down a bit before mooning again. I don’t think it’ll be long before this happens, but until then it is unfortunately very ResidentSleeper.
I’m buying a new microphone today to make better quality content for you guys, and I’m introducing a new series where I enter extremely early on MemeCoins/LowCaps. As well as a forex trading series.
The Alpha levels are about to get very intense, I’m gonna bring my best, and AbsoluteSalt is already killing it out there.
Get ready for Alpha overload Dystofam.
Lots of love,