Crypto Market in “Dangerous Waters”: Key Risk Indicator Raises Alarms

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The crypto market has made a nice comeback in the last few days, with the weekend showing some of its strongest gains as the largest crypto by market cap  Bitcoin hit $71k market since March. But hold on! Despite this exciting rise, CryptoQuant’s on-chain analyst, Crypto Lion, is raising a red flag. He warns that the Market Cap to Open Interest ratio suggests the market could be headed into dangerous waters.

Market Cap/Open Interest Ratio Signals High Risk

According to Lion, the ratio of Market Cap to Open Interest—a key indicator of market risk—is flashing warning signals. This metric, which helps investors gauge potential risks in the market, shows that Open Interest levels are at concerning highs.

Since the FTX collapse in August 2023, Open Interest has been rising sharply. And meanwhile, after one year of Bitcoin hitting $49,000 in August 2024, major exchanges seem to be using both spot and perpetual contracts to apply pressure on the market, keeping prices under control and limiting gains. 

This has pushed the Market Cap/Open Interest ratio to a risky level, putting traders on alert.

Binance’s Market Moves Add to Risks

Crypto Lion suggests that Binance’s approach has added to market instability. By using spot and perpetual contracts, Binance appears to be putting downward pressure on prices, making it hard for the market to rally. This tactic creates a challenging environment, especially for traders hoping for a breakout.

Adding more fuel to the fire, exchanges like Coinbase and others have been expanding crypto-related exchange-traded funds (ETFs). While ETFs are seen as a positive step for long-term growth, they also add complexity, possibly making it easier for big players to influence market trends. 

This mix of high Open Interest and increased ETF activity has raised concerns over potential price manipulation.

What Next Then?

Crypto Lion advises caution, pointing out that high Open Interest on big exchanges like Binance could cause unexpected price changes. Therefore in this risky market, managing risks carefully is crucial.