The trading range for Bitcoin, which makes up around 40% of the estimated market value of all cryptocurrencies, was the smallest since October 2020 last week, at roughly 5.4%.

Some indicators suggest that the Bitcoin market is about to exit the tightest trading range it has experienced in nearly two years.

According to one metric, even though the prices of Bitcoin and Ether have both declined by more than 50% this year, their leverage ratios are at their highest levels ever. Bitcoin and Ether are the two largest tokens by market value. According to blockchain analytics provider CryptoQuant, this is computed by dividing the total open interest for perpetual swap contracts by the total number of coins held in reserve on exchanges.

Traders who see a so-called tail risk, or the possibility of a loss occurring due to a rare event, are "getting priced out," according to Darius Sit, co-founder of Singapore-based cryptocurrency investment fund QCP Capital. "People think the market has stabilised and are willing to make bigger speculative positions," he said.

Because perpetual contracts, unlike conventional calendar futures, never expire, they are often preferred by cryptocurrency traders in part because they enable them to maintain highly leveraged positions.

According to data published by Bloomberg, Bitcoin, which makes up approximately 40% of the total market value of all cryptocurrencies, traded last week within a range of only about 5.4%, the smallest since October 2020. Following the slump of two years earlier, prices rose steadily for several months, eventually driving Bitcoin to a record high in April 2021.

Since June, when prices fell as a result of the failure of the Terra stablecoin ecosystem, the closure of the hedge fund Three Arrows Capital, and the insolvencies of Voyager Digital and Celsius Network, cryptocurrencies have been in a holding pattern.

Bitcoin advanced 0.8 per cent to $19,900 as of 7:07 a.m. in New York on Tuesday, while Ether was up 4.3 per cent at $1,666.

More traders seem to be placing positive leveraged bets, despite recent hawkish remarks from the Federal Reserve regarding inflation and the economy's continued pressure on riskier assets, including cryptocurrency.

Overall, the much-anticipated upgrade on the Ethereum blockchain later this month is probably the main driver of the rising leverage. The most significant network in terms of commerce is about to switch from its current system, which relies on miners, to a more energy-efficient one, which uses staked currency. The open interest in perpetual swap contracts with Ether as the base currency reached an all-time high at the end of August, according to data gathered by blockchain research company Kaiko.

“As we get closer to the Merge, ETH leverage will continue to build up,” said Shiliang Tang, chief investment officer at crypto-asset investment firm LedgerPrime.

Skew, a data site, reports that financing rates for both Bitcoin and Ether perpetual have been negative over the previous few weeks. Exchanges bind contracts to their underlying spot price using the so-called funding rate, also known as the cost of trading. Investors with long positions pay interest to those with short positions when the rate is positive, and vice versa.

Because they are either betting on an unsuccessful or delayed switch to proof of stake for Ethereum or hedging long spot Ether positions before the Merge, Kaiko assessed that traders are biased to the downside.

According to Andrew Tu, head of growth at the cryptocurrency algorithmic-trading company Efficient Frontier, which takes neutral positions in trading, "the development of leverage with more bears could result in a short squeeze, as over-leveraged bears be liquidated if prices move up."