Crypto leverage hits yearly high – Is a bullish Q4 reset coming?

As the market approaches Q4, one divergence stands out as a potential setup for crypto’s next leg.

At the current market level, high-cap crypto assets have held relatively well despite the Fed rate hike, keeping the total crypto market cap around $2.7 trillion. However, on-chain data shows that the pressure for a short-term pullback could be building.

To begin with, speculative capital is ramping up. As can be seen in the chart below, the leverage in the crypto market has reached the highest level since the 10th of October. Despite this, traders continue to take leveraged positions, with the Machi brothers, for instance, increasing their position to $131 million. 

The key takeaway? Traders are betting on further upside, which shows growing confidence in crypto.

However, this is where the divergence starts to show. The TD Sequential has been incredibly accurate on Bitcoin’s [BTC] 4-hour chart. The indicator’s recent buy signal was issued before the 8.5% rebound seen over the past few days. But now, the signal has flipped and issued a sell signal. This means that short-term bullish momentum is likely to be capped, with profits being taken ahead of the next leg higher.

Notably, more than $100 million in sell orders already exist around the current price range of Bitcoin. This indicates that sellers are ready to exit at these levels, which may limit further gains for BTC. As a result, a long squeeze of leveraged positions is likely to occur, attracting new buyers of BTC, thus creating a bull trap.

That said, what if this setup is more bullish than bearish?

Crypto is showing a key market divergence

More than a week into Q4 and the macro backdrop is already very volatile.

The Kobeissi letter expects an “eventful” quarter, with hikes in rates, midterm elections, oil above $100, and a 10-year yield above 5%, all adding pressure. At the same time, stocks are near record highs, while AI spending plus earnings season could add another layer of volatility. With monetary policy, geopolitics, energy, elections, and AI all coming together, Q4 could be a crucial test period for crypto.

However, crypto has managed to remain resilient despite the recent market FUD, thus creating a divergence from other asset classes. As the post below demonstrates, analysts believe that the shift of money from US equities into crypto may have begun. Bitcoin has outperformed the Nasdaq by 42% over the past three months.

Meanwhile, the BTC/Gold ratio has climbed to 18.55. A month ago, one Bitcoin could buy about 15.3 ounces of gold. Today, its purchasing power against gold has risen by roughly 21%. 

In essence, Bitcoin’s resilience amidst the current market FUD is anything but random. 

Rather, it points to a growing divergence between crypto and traditional risk assets. According to AMBCrypto, such a scenario could become increasingly important for crypto going into Q4. With macro volatility lingering high, crypto’s relative strength could lure in more capital as investors seek to diversify.

That’s when a short-term pullback could actually turn bullish. A flush of leveraged positions could reset the market and clear the decks of excess speculation, paving the way for fresh buyers to enter with FOMO. Should this occur, the pullback could set the stage for BTC to reclaim $85k and spark a stronger Q4 rally.

Final Summary

• Crypto is staying strong despite market FUD.
• A short-term pullback could set up BTC for a stronger Q4 rally.