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Bitcoin (BTC) has experienced a remarkable 70% surge in value this year, reaching a nine-month peak of over $29,000. Despite the sharp upturn in prices, the derivatives market has not witnessed a significant increase in the use of leverage, indicating a low risk of abrupt price fluctuations resulting from forced liquidations.

Liquidations are the enforced termination of bullish long and bearish short positions in leveraged perpetual futures markets, which enable traders to initiate positions with a value significantly higher than their margin deposit. These forced closures for cash or cash equivalents occur when the trading entity fails to satisfy the margin shortfall resulting from the market moving unfavorably against their bullish or bearish speculation.

When the level of leverage in the market is high, as indicated by the ratio between the value of perpetual futures contracts (open interest) and the market capitalization of a cryptocurrency, short liquidations can amplify bullish movements. This can cause more short positions to be forced to close, resulting in a short squeeze. Likewise, long liquidations can amplify bearish movements, leading to a long squeeze.

Long and short squeezes were prevalent during the 2021 bull market and early 2022 bear market days due to the significant amount of leverage in the market relative to its size. As a result, price movements led to the liquidation of leveraged trading positions worth billions of dollars. However, the leverage ratio has steadily decreased this year.

"High open interest relative to market cap means the market could be vulnerable to a short-squeeze or liquidation cascade, which would result in a price swing being more volatile than it otherwise would have been due to forced buying or selling, respectively," analysts at Blockware Solutions said in a weekly newsletter.

"The medium-term trend of decreasing open interest/market cap has not been broken, which is reassurance that, even in the event of downward volatility, price is most likely not going to decrease to the level it was at to begin the year," the analysts added.

The ratio of perpetual futures open interest to market has been decreasing since the collapse of FTX in early November. FTX was previously the third-largest cryptocurrency exchange globally and a popular platform for trading perpetual futures.

Blockware Solutions suggests that the low ratio, which has remained steady even amidst the recent price consolidation, indicates a subdued risk appetite among investors.

"BTC has essentially traded sideways for the past three weeks, yet, we haven’t seen a build-up in open interest. This is a signal that the market is still in a risk-off mode,". According to Blockware analysts, non-expiring perpetual futures tend to be sought after during periods of stagnant prices, as was observed prior to the collapse of FTX.

Source Coindesk