Bitcoin Leads Crypto Back Above $3 Trillion as Risk Builds

(Bloomberg) -- Digital assets have reclaimed $3 trillion in market value for the first time since January after Bitcoin's stunning rally, but traders are also piling into leveraged bets in perpetual futures, increasing the risk of rapid price swings.

The market has added more than $740 billion in value since the US Treasury's announcement last month that it would increase buybacks of long-dated bonds, according to CoinGecko data. Leverage is building alongside the gains. Open interest in perpetual futures across tokens has climbed to nearly $160 billion, the highest since late October last year, Coinglass data show.

More than $920 million in bearish bets were liquidated on Monday as prices surged. A continued unwinding of short positions could fuel a squeeze, as traders rush to buy back assets to close losing bets, adding further upward pressure on prices. Yet open interest continued to rise, suggesting new leveraged positions are entering the market even as shorts are forced out.

"A squeeze normally destroys open interest," said Rachael Lucas, an analyst at BTC Markets. "This one didn't, which means positions are being replaced immediately. Traders are chasing this, not de-risking into it. That's why the next 5% in either direction will be faster than people expect."

Bitcoin retreated to $85,100 on Tuesday after surging nearly 8% in the US session to $87,381, its highest level since January.

Perpetual futures — contracts with no fixed expiry — are the largest segment of crypto trading by volume and an important gauge of speculative positioning.

The current combination of open interest — the number of open contracts — rising while short positions are being closed suggests the rally isn't simply a case of traders closing bearish positions and reducing leverage. They're being replaced by fresh exposure, which means a price move either way could trigger a wave of short liquidations or an unwinding of leveraged longs.

"The main thing to watch is leverage running ahead of spot," said Caleb Lin, senior sales trader at QCP Group. "Rising perp open interest is healthy when spot is coming with it. When it builds faster, the market becomes reflexive: a modest reversal triggers long liquidations, which push prices lower and force further deleveraging."