Use the LPOC indicator to gain insights into leverage risk and build an early warning system before a market big dump.

This selected long article is translated by Benpao Finance · Web3.0 Reading Room from Frederik Theissen's "Inferring Leveraged Positioning from Price and Open Interest." The Leverage Position Open and Close (LPOC) indicator analyzes prices and Open Interest (OI), revealing real-time leverage trends in the cryptocurrency market. By going beyond funding rates and liquidation data, it more accurately identifies market tops, bottoms, and systemic risks.

1. Understanding the dynamics of leverage in the crypto market New Method for Position Tracking Leverage is a core feature of the cryptocurrency market, driving and exacerbating wild price swings. The trading volume of derivatives (especially crypto-native perpetual contracts) often far exceeds that of spot trading, amplifying market sentiment and volatility. Understanding how traders enter and exit leveraged positions is crucial for assessing short-term price trends and identifying macro market trends. Traditionally, the industry relies on clearing data and funding rate assessments to evaluate leverage and position behavior. However, these indicators have significant flaws:
2. Clearing Data: Although widely adopted, it only captures forced liquidations and reflects a small portion of total position changes. Additionally, the inconsistent reporting standards across exchanges (with some platforms delaying or missing data) and its retrospective nature limit its value for real-time decision-making.
3. Funding Rate: Measured based on the perpetual-spot price difference to assess position costs, reflecting the direction of net positions. However, it reacts slowly to market fluctuations and cannot reflect the scale of position adjustments, and may remain subdued during significant deleveraging events. *Typical case: During large-scale long liquidations, if the spot and perpetual prices decline in sync, the funding rate changes very little, even though positions are significantly liquidated. A similar delay also exists during short squeezes. To address the above shortcomings, this article introduces the Leverage Position Opening and Closing (LPOC) indicator, which infers position changes by analyzing the relationship between price and open interest (OI). Unlike traditional indicators, LPOC provides a more immediate and comprehensive view of leverage dynamics, capturing the changes in active and forced positions under various market conditions using OI data. The POC method is based on the interaction between price trends and OI (which tracks all open derivative contracts). Analyzing the linkage between the two can infer four types of position behaviors (see Figure 1):
4. Long Position Opening: Price rises along with OI, traders increase long exposure in an uptrend.
5. Short position opening: A price decline accompanied by an increase in OI indicates that traders are opening short positions.
6. Long Position Liquidation: The price is declining in sync with OI, indicating that long positions are being closed.
7. Short Covering: Price increases accompanied by a decrease in OI indicate that short positions are exiting.

The basic assumption of the LPOC indicator is that, on average, the positions reflected by OI are mainly composed of opening trades that follow the mainstream price trend. This means: · An increase in OI when prices rise usually corresponds to new long positions; · An increase in OI when prices drop indicates new short positions; · When OI diverges from the price trend, it can be inferred as a closing position behavior. This method is independent of asset classes and is applicable to all assets for which OI data is available, providing a consistent analytical perspective across different markets. The signal processing procedure involves: calculating the short-term trends of price and OI, and then deriving a composite indicator to reflect directional consistency through the product of the trend values. It should be noted that due to differences in market participation and the inherent bullish tendency of the crypto market, the magnitude of bearish signals (short positions opening/closing) is usually much lower than that of bullish signals. Therefore, we provide a standardized version of the indicators to ensure comparability and highlight the relative strength of various positions. 2. Bitcoin Insights: Marking Tops and Bottoms

The green line indicates the Bitcoin long liquidation signal, while the red shaded area represents when the signal exceeds the set threshold (long liquidation zone), indicating increased liquidation activity. The black line represents the Bitcoin price in dollars (secondary axis). Applying LPOC to Bitcoin reveals a clear pattern that highly correlates with historical market turning points. Figure 2 clearly shows that after price declines, long positions being closed often mark local bottoms. This signal accurately identifies several local lows, especially during periods of sustained increases (such as from June 2020 to mid-2021 and from the end of 2022 to now). It is particularly evident when observing the red shaded areas (which often coincide with the lows). The higher the signal strength, the more significant the accuracy, indicating that extreme deleveraging events will increase the probability of price rebounds. This is consistent with the view that "forced deleveraging creates market inefficiencies through accelerated selling." 3. Identifying Market Frenzy and Bubbles

Figure 3 shows that a surge in BTC long positions often marks the frenzy and bubble zones. Significant long positions frequently emerge before or during market peaks, reflecting traders' excessive optimism. Such accumulation of long exposure often signals potential reversal zones, with the market typically peaking after the surge, highlighting the value of LPOC in identifying high-risk areas.

The pattern is clearer when applied to ETH (Figure 4). The surge in long positions also often leads or closely follows market tops. Shortly after the expansion of long exposure, the market tends to peak, confirming the consistency of this signal across assets and its value in anticipating excessive positions.

The difference in long and short position openings (standardized long openings minus standardized short openings) highlights the dominant market sentiment. Figure 5 visualizes this difference, with red/green shaded areas (based on set thresholds) representing long/short dominated periods. Typically, long positions surge during price increases, while short positions peak during declines. This is consistent with the nature of the LPOC indicator: when OI rises, it detects long openings in an upward trend and short openings in a downward trend. But the key finding is: when the position strength peaks and falls back, the trend often reverses, indicating a potential market turning point. 4. Market Analysis and Narrative Construction The LPOC indicator provides a nuanced perspective for understanding dominant positions in key market events. A typical case is the FTX collapse in November 2022, which can be traced through the position dynamics of BTC and SOL.

The green line represents long position liquidation, the red line represents short position liquidation, and the black line represents the Bitcoin price (in USD, secondary axis). The marked events (1, 2, 3) highlight the key liquidation sequences. Regarding BTC (Figure 6): The price ended a slow upward consolidation before the crash, with Event 1 showing initial short covering. The crash on November 5, 2022, triggered a surge in long liquidations (Event 2), reflecting panic exits and liquidations during the price drop. When the market rebounded, shorts opened during the decline were squeezed, leading to forced liquidations (Event 3).

Regarding SOL (Figure 7): The LPOC indicator shows a significant pattern during the same period. SOL because The FTX crash caused a price plunge, with a large number of long positions liquidated when it fell below $10 (Event 1 in the image). During the market recovery, the shorts opened during and after the crash (not shown) were short squeezed, followed by new short positions being opened (Blue Event Peak 3), and rapid and repeated liquidations occurred when SOL broke through $20 within a few days (Event Peak 4). The clear short-squeeze cycle of SOL verifies the ability of this indicator to track specific market responses, showing how misaligned dominant positions amplify volatility and reveal trading behavior under pressure. The repeated short-squeezes during SOL's over 100% rise within approximately one month also expose the limitations of LPOC: it can only identify one dominant position pattern at a time. This recurring misalignment (where the market averages build exposure in the wrong direction) highlights the value of the LPOC tool in interpreting market narratives and identifying leverage dynamics that create inefficiencies. 5. Cross-Asset Perspective Deleveraging trend across the entire market

The visualization combines the 90th percentile leverage signals with the total market capitalization (excluding the top five cryptocurrencies). The red shaded area indicates periods when the 90th percentile signal exceeds 0.01, which may suggest a market-wide position adjustment. The heatmap below displays the temporal and cross-sectional distribution of the signals. Expand the LPOC analysis to hundreds of cryptocurrencies. Figure 8 shows the heat map and the 95th percentile of the leverage ratio. This view reveals significant patterns: during systemic deleveraging events (such as in May 2021 and November 2022), the long positions of various assets often close simultaneously. Such synchronous surges indicate large-scale deleveraging, often coinciding with local market lows and the state of bubble deflation. The synergy of cross-asset long liquidations highlights its role as a leading indicator of overall market pressure and recovery. The deleveraging event becomes a healthy market mechanism by clearing excess leverage, but it also creates inefficiencies due to panic liquidations exacerbating price declines. This regularity in the crypto market makes it a potential entry point or opportunity for traders. 6. Practical Application The LPOC indicator provides multiple actionable insights: · Bottom building position High long liquidation signals often indicate a high probability entry point after capitulation. · Top Risk Management The significant surge in long positions indicates that bulls are overly aggressive, signaling potential risks. · Short Squeeze Detection Short positions opened after an increase may lead to a rebound driven by short squeezes. · Market Health Monitoring Cross-asset views highlight systemic leverage trends and assist in portfolio risk assessment. Seven, considerations and future improvements | Time resolution limitation LPOC is adept at observing positions on a weekly/monthly level, but lags behind in intraday/weekly fluctuations. Future versions could design a higher resolution market position view. | Winner-takes-all classification LPOC identifies a single dominant signal, overlooking and coexisting position behavior in a volatile market. Future iterations may calculate the probabilities of all position types, providing a more refined view of competitive positions. | Integration with auxiliary indicators Combining exchange traffic data or social media sentiment can enhance LPOC, differentiate between liquidation-driven closures and profit-taking, and detect market manipulation. A hybrid model will improve accuracy. 8. Conclusion The Leveraged Position Open and Close (LPOC) indicator provides a valuable tool for interpreting leverage dynamics in the cryptocurrency market. By examining the relationship between price and open contracts, it offers a real-time, cross-asset view of trader positions under volatile conditions. Compared to settlement data and funding rates, LPOC provides more comprehensive and timely insights to help identify market tops, bottoms, short squeezes, and systemic changes. #Web3 Reading