Open positions in the crypto market reached $160 billion: Leverage warning

The total value of the cryptocurrency market has increased by more than $740 billion since the US Treasury Department announced last month that it would increase buybacks of long-term bonds.

With the rise in prices, leveraged positions also grow. Coinglass data shows that the total open position in futures contracts in cryptocurrencies has reached approximately $160 billion. This is the highest level since the end of October last year.

Over $900 million short positions were liquidated

During the rapid rise in cryptocurrency prices on Monday, more than $900 million worth of positions belonging to investors who opened bearish transactions were liquidated.

If short positions continue to be closed, it may trigger a new "short squeeze" movement in the market. In such a scenario, losing investors are forced to make purchases to close their positions, which may further increase the upward pressure on prices.

However, it was noteworthy that the amount of open positions continued to increase despite large-scale liquidations. This indicates that new leveraged transactions entered the market after the short positions were closed.

Speaking to Bloomberg, BTC Markets analyst Rachael Lucas stated that under normal circumstances, a short squeeze would be expected to reduce the amount of open position and made the following assessment:

"This did not happen this time. We are seeing positions being replaced immediately with new ones. Investors are chasing the move rather than mitigating risk. Therefore, the next 5 percent move in the price, regardless of which direction, may occur faster than many expect."

Increased leverage increases the risk of adverse movements

Perpetual futures contracts with no maturity date constitute the largest derivative product segment of the cryptocurrency market in terms of transaction volume. The amount of open positions in this market is also among the indicators closely followed to measure the speculative tendency of investors.

The fact that open positions continue to increase in a period when short positions are liquidated shows that the increase is not only due to the closing of positions by investors who opened downward transactions.

In other words, new leveraged positions are added to the market. This structure may bring about new short liquidations if the price goes up sharply, and the rapid closing of leveraged long positions in a downward move.

QCP Group senior sell trader Caleb Lin said the key indicator to watch is whether growth in leveraged futures is outpacing demand in the spot market.

Lin said, "If this is accompanied by purchases in the spot market, the increase in open positions in continuous futures transactions can be considered healthy. However, when the growth on the futures side occurs faster, the market turns into a self-feeding structure. A small withdrawal leads to the liquidation of long positions, which pushes the prices lower and triggers new liquidations." he said.

According to Lin, a similar mechanism worked in short positions when Bitcoin rose above 83 thousand dollars. On the other hand, the rapid growth of long-side leverage in an environment where demand in the spot market remains weak may cause the same conditions to emerge in the opposite direction this time.