Ethereum's Q1 Gains Face $10B Liquidation Threat – What's Next?
The first quarter of the year has historically been a strong period for Ethereum (ETH), but a significant risk looms this time around.
While Q1 traditionally brings bullish momentum for ETH, the cryptocurrency's massive $10 billion in leveraged positions might lead to liquidation risks, potentially limiting its upward movement. Andrew Kang, co-founder of Mechanism Capital, suggests that this leverage risk could confine ETH's price within a $2,000–$4,000 range for the foreseeable future. He stated:
“ETH has added $10B+ in leverage since the election. This unwind will be painful, but ETH won’t go to zero. It will simply range from $2K to $4K for a very long time.”
Before the U.S. elections, Ethereum's leveraged positions (borrowed assets used for speculative trading) were at $9 billion. By December, this figure had surged to over $19 billion. However, a sharp price drop liquidated many of these positions, pulling ETH’s price down to around $3,100.
Is Leverage a Barrier to ETH’s Growth?
Kang further highlighted that the leverage buildup wasn’t significantly influenced by the "basis trade" involving CME Futures, which he described as “delta-neutral”—for every ETH bought in the spot market, an equivalent position is shorted in the futures market. Instead, speculative traders drove the leverage to excessive levels.
Historical trends support Kang’s concerns. During previous rallies, whenever open interest in leverage increased faster than the price, it often preceded a pullback or local price top.
For instance, in early November and late December, spikes in leverage led to escalated liquidations, with December 20 alone seeing over $300 million in ETH liquidations, primarily from long positions.
Despite these challenges, ETH has historically performed well in Q1. Data from Coinglass reveals an average Q1 gain of 81%, with ETH closing five out of seven first quarters in the green. If this trend continues, ETH could see notable gains in Q1 2025.
What Lies Ahead?
Nevertheless, the risk of liquidation could temper expectations for a significant upside. As of now, Ethereum has rebounded to over $3,000 after briefly dropping to $2,900 due to bearish movements earlier in the week. Whether ETH can overcome these hurdles and sustain its historical Q1 success remains to be seen.
