Crypto market cap hits $3 trillion again: Why rising Bitcoin leverage could trigger a sharp price swing | Hindustan Times

The total cryptocurrency market value has climbed back above $3 trillion for the first time since January. The rise comes after a strong rally in Bitcoin, which has lifted the broader digital asset market. But the rally is also bringing more leveraged trading into the market. This could make crypto prices move sharply in either direction if traders start closing their positions quickly.The total crypto market has gained more than $740 billion since the US Treasury announced last month that it would increase buybacks of long-dated bonds. The data comes from CoinGecko. The market's rise has happened alongside a sharp increase in leverage through perpetual futures, according to Bloomberg.Bitcoin leverage risesOpen interest in perpetual futures across cryptocurrencies has climbed to almost $160 billion. This is the highest level since late October last year. Coinglass data showed the rise in open interest. Open interest measures the total value of futures contracts that are still open. A rise in open interest means more traders are holding active positions and taking on exposure to future price moves.Bitcoin's rally caused more than $920 million worth of bearish positions to be liquidated on Monday. These were mainly traders who had bet that crypto prices would fall. When prices moved higher instead, their positions were automatically closed because they could no longer meet the required margin. The forced buying can push prices even higher.Also read: Why are Dow Jones futures flat as oil tops $100 and Fed rate hike fears rise?If more short positions are forced out, the market could see another short squeeze. In a short squeeze, traders who bet on falling prices are forced to buy the asset to close their losing positions. That buying can create additional upward pressure on Bitcoin and other cryptocurrencies. However, the market is also seeing new leveraged positions enter at the same time, according to Bloomberg.Bitcoin price swingsUsually, a short squeeze reduces open interest because losing positions are closed. That is not happening in the current rally. Instead, open interest is continuing to rise, suggesting that new leveraged trades are replacing the positions being liquidated. This means traders are still taking fresh risks even as some bearish traders are forced out."A squeeze normally destroys open interest," said Rachael Lucas, an analyst at BTC Markets. She said this rally is different because positions are being replaced almost immediately, according to Bloomberg. According to Lucas, traders are chasing the price move instead of reducing their risk. She warned that the next 5% move in either direction could happen faster than traders expect.Bitcoin fell to about $85,100 on Tuesday. It had jumped almost 8% during the US trading session on Monday. Bitcoin reached $87,381, its highest level since January. The pullback highlights the risk of a sharp reversal after such a fast rally.Perpetual futures explainedPerpetual futures are crypto contracts that do not have a fixed expiry date. They are one of the biggest parts of crypto trading by volume. Traders use them to bet on whether Bitcoin and other tokens will rise or fall. Because these contracts can be traded with leverage, they can increase both gains and losses. That makes perpetual futures an important measure of how much speculative activity is in the crypto market.Also read: Why is QQQ rising? AI stocks rally as Treasury yields fall below 5%The rise in open interest shows that the rally is not simply being driven by traders closing bearish bets. Fresh leveraged positions are being added even while short positions are being liquidated. This creates greater exposure to a sudden move in either direction. If Bitcoin rises sharply, more short positions could be liquidated. If Bitcoin falls, leveraged long positions could face forced selling.Bitcoin spot demand"The main thing to watch is leverage running ahead of spot," said Caleb Lin, senior sales trader at QCP Group, according to Bloomberg. Spot trading refers to actual buying and selling of Bitcoin rather than leveraged derivatives positions. Lin said rising perpetual futures open interest can be healthy when actual spot demand is also rising. But if leverage grows faster than spot demand, the market can become more unstable.Lin said a market with excessive leverage can become "reflexive", meaning one price move can create another. For example, a small Bitcoin decline could trigger liquidations of leveraged long positions. Those liquidations would force more selling. More selling could push Bitcoin lower and trigger additional liquidations. This can turn a relatively small price decline into a much larger move.Also read: Why is the S&P 500 under pressure as Fed rate hikes push interest rates higher?Bitcoin long leverageLin said the current setup is similar to the mechanism that helped Bitcoin move above $83,000. At that time, rising prices forced short sellers to close their bearish positions, according to Bloomberg. Their forced buying added more upward pressure. But Lin warned that if long-side leverage continues building while actual spot buying remains thin, the same setup could work in reverse.The rally is not happening only in the derivatives market. Institutional demand for Bitcoin has also increased. US spot Bitcoin exchange-traded funds recorded $999 million in net inflows on Monday. This was their biggest single-day inflow since October 6, when Bitcoin was trading around its record-high period above $126,000. The ETF inflows suggest that some investors are also buying Bitcoin through regulated investment products.Bitcoin ETF inflowsThe stronger ETF demand comes after the funds suffered large outflows earlier last week. The trend then changed, with the ETFs turning positive on Thursday and Friday. Together, they attracted about $593 million during those two days. This shows that demand for Bitcoin through spot ETFs has improved after the earlier selling pressure.The Bitcoin-led rally has spread to other cryptocurrencies. Zcash, a privacy-focused cryptocurrency, has climbed sharply. HYPE, the native token of the Hyperliquid blockchain, has also surged to a record high. The wider gains show that buying interest is not limited to Bitcoin, according to Bloomberg.Crypto rally reversal riskDespite the strong price gains, traders remain uncertain about whether the rally can continue. The main concern is whether real spot demand will remain strong after the forced buying from short liquidations fades. If fresh buyers continue entering the market, the rally could have stronger support. If leveraged traders are mainly driving the move, the market could become more vulnerable to a sudden reversal.Rachael Lucas said short squeezes can push prices higher but do not necessarily create long-term holders, according to Bloomberg. She said the key question is whether spot demand replaces the forced buying from traders covering short positions. This will be important over the coming week. If spot buying remains strong while leverage stays controlled, the rally could have a different structure from a move driven mainly by liquidations. If leverage continues rising faster than actual buying, even a relatively small move in Bitcoin could trigger a much larger price swing.