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Ethereum’s Q1 Gains vs $10B Liquidation Risk – What’s Next?
Historically, the first quarter of the year has been incredibly bullish for Ethereum (ETH), with an average gain of 81% over the past seven years. However, this time around, a significant threat looms in the form of a staggering $10 billion in leverage that could potentially cap any upside potential.
Data reveals that prior to the US elections, ETH’s leverage stood at a relatively modest $9 billion. However, in the aftermath, it skyrocketed to an unprecedented $19 billion in December. Following the sharp price decline that ensued, liquidations took their toll on positions, dragging ETH down to around $3,100.
The question remains: will this excessive leverage derail Ethereum’s historically strong Q1 performance?
Andrew Kang, Co-Founder of crypto VC firm Mechanism Capital, recently cautioned that the unwind of such massive leverage will be a painful process. He believes it would lead to ETH ranging between $2,000 and $4,000 for an extended period.
Kang attributes this excessive leverage to speculative traders rather than the “basis trade” driven by CME Futures, which he describes as “delta-neutral.” Essentially, every ETH bought in the spot market is shorted in the futures market. This would theoretically minimize the impact on overall liquidity and risk exposure.
However, data suggests that such a massive increase in leverage has historically been accompanied by a pullback and local top followed by liquidations. Both early November and late December witnessed this exact scenario play out, resulting in significant losses for long positions, with over $300 million worth of ETH being liquidated on December 20th.
Coinglass data highlights that Q1 has consistently been Ethereum’s strongest quarter, with an average gain of 81%. In the past seven years, only two Q1s resulted in a negative close. This historical precedent would suggest that a significant upside is expected this quarter.
Nonetheless, the looming threat of $10 billion in liquidation risk cannot be ignored. As ETH attempts to break above the psychological barrier at $3,100, the uncertainty surrounding its potential for growth hangs precariously in the balance.
As Ethereum’s price currently sits above the critical threshold, it is crucial that investors closely monitor these circumstances and stay vigilant against any market manipulation or sudden spikes in leverage that could further exacerbate this risk.
The narrative remains: will Ethereum’s Q1 gains be able to overcome the looming threat of a $10 billion liquidation risk?
Source: ambcrypto.com
