Was the Market Over-leveraged?Sep 8, 2021
$4B and $3.6B of BTC and ETH open interest were respectively wiped out yesterday. BTC’s open interest ran up from its local low of $10B in Jul. 2021 to over $18B a few days ago. An 8B rise in OI, and half of that was wiped out yesterday.
If you look at the absolute open interest levels, it’s quite clear we were growing too fast. But looking at open interest growth relative to market cap helps us discern if leveraged traders were getting ahead of themselves and piling into positions before BTC had the chance to move.
This wasn’t exactly the case, as the OI/Market Cap ratio suggests we never really hit “excessive” levels of leverage. Thinking about open interest levels and price in tandem makes sense (i.e. what price was BTC when we last hit this level of open interest). But considering the growth in asset market caps and open interest, it doesn’t seems like the market was too far extended. Even the Chaddest of leverage traders were caught off guard by yesterday’s events.