Bitcoin ( BitcoinTC ) has risen 70% in the past year to hit nine-month highs above $29,000. While the sharp rally has brought the derivatives market back to life, the overall use of leverage remains muted, suggesting a low risk of “liquidations-induced” wild price swings.

Liquidations are the forced closing of bullish long or bearish short positions within leveraged perpetual futures market. This allows traders to open positions that are much greater than the margin money. Forced closure of cash or cash equivalent occurs when the trading entity cannot meet the margin requirements due to the market’s movement against the bullish or bearish bet.

Short liquidations can lead to bullish movements. This, in turn, creates more shorts and leads to a short squeeze. Long liquidations can also exacerbate bearish movements, leading to a lengthy squeeze.

During the 2021 bull market and the early bear market days in 2022, when leverage was high relative to market size and prices would move billions of leveraged trade positions, long/short squeezes were common. The ratio has been decreasing this year.

Blockware Solutions analysts stated in a weekly newsletter that “high open interest relative to market capital means the market could become vulnerable to a short squeeze or liquidation cascade which would result in price swings being more volatile than they otherwise would have been due forced buying or selling.”

Analysts stated that the trend towards decreasing open interest/market capital has not been broken in the medium-term. This is a reassurance that price will not fall to the same level as it was at the beginning of the year, even if there is downward volatility.

The open interest ratio to market capitalization continues its decline, which indicates low chances of liquidations. (Blockware Solutions, Glassnode) (Blockware Solutions, Glassnode)

Since FTX went bankrupt in November, the perpetual futures open market interest to the market ratio has fallen. FTX was once the third largest cryptocurrency exchange in the globe and was one of the most popular avenues for trading perpetual futures.

According to Blockware Solutions, the ratio has remained low despite recent price consolidation. This is a sign that investors have low risk appetite.

“BTC has traded essentially sideways over the past three weeks but we haven’t seen an increase in open interest. This signal is that the market remains in a risk-off state,” Blockware analysts said. They also noted that non-expiring perpetual options are often in demand during sideways price action as was the case before the implosion of FTX.

According to CoinDesk data, Bitcoin has been locked within a narrow range between $29,000 and $27,000 since March 21st.

Edited and spelled out by Parikshit Moishra.