The trading range for bitcoin, which makes up roughly 40% of the estimated market value of all cryptocurrencies, was the smallest since October 2020 last week, at about 5.4%.

Some indicators suggest that the Bitcoin market is about to exit the tightest trading range it has experienced in nearly two years.

According to one metric, despite the fact that the prices of Bitcoin and Ether have both declined by more than 50% this year, their leverage ratios are at their greatest levels ever. According to blockchain data provider CryptoQuant, it is computed by taking the open interest for perpetual swap contracts and dividing it by the quantity of coins held in reserve on exchanges.

Traders who see a so-called tail risk, or the possibility of a loss occurring due to a rare event, are “getting priced out,” according to Darius Sit, co-founder of Singapore-based cryptocurrency investment fund QCP Capital. “People think the market has stabilized and are willing to make bigger speculative positions,” he said.

Because perpetual contracts, unlike conventional calendar futures, never expire, they are favored by cryptocurrency traders in part because they let them maintain highly leveraged positions.

According to data published by Bloomberg, Bitcoin, which makes up approximately 40% of the total market value of all cryptocurrencies, was traded last week within a range of only about 5.4%, the smallest since October 2020. Following the slump of two years earlier, prices rose steadily for several months, eventually driving Bitcoin to a record high in April 2021.

Since June, when prices for cryptocurrencies fell as a result of the failure of the Terra stablecoin ecosystem, the bankruptcy of Voyager Digital and Celsius Network, the demise of the hedge fund Three Arrows Capital, and the demise of the hedge fund Terra.

More traders seem to be placing positive leveraged bets, despite recent hawkish remarks from the Federal Reserve regarding inflation and the economy’s continued pressure on riskier assets, including cryptocurrency.

Shiliang Tang, chief investment officer at cryptocurrency asset investing company LedgerPrime, predicted that ETH leverage would increase as the Merge approached.

Skew, a data-site, reports that financing rates for both Bitcoin and Ether perpetuals have turned negative during the previous few weeks. Exchanges bind contracts to their underlying spot price using the so-called funding rate, also known as the cost of trading. Investors with long positions pay interest to those with short positions when the rate is positive, and vice versa.

Because they are either betting on an unsuccessful or delayed switch to proof of stake for Ethereum or hedging long spot Ether positions before the Merge, Kaiko assessed that traders are biased to the downside.

According to Andrew Tu, head of growth at the cryptocurrency algorithmic-trading company Efficient Frontier, which takes neutral positions in trading, “the development of leverage with more bears could result in a short squeeze, as over-leveraged bears be liquidated if prices move up.”