Leverage Skew

Leverage skew refers to the imbalance between the amount of long and short leverage being utilized in a market. It is often observed in the context of perpetual swaps, where a significant majority of traders may be leaning in one direction, such as being heavily long during a bull market.

This skew forces the funding rate to adjust, creating a cost for the majority and a reward for the minority. Leverage skew is a powerful indicator of market sentiment and can signal potential liquidation cascades if the price moves against the dominant position.

Traders analyze this metric to identify crowded trades and to anticipate potential volatility as positions are forced to close. It reflects the behavioral dynamics of market participants and the collective appetite for risk.

Monitoring leverage skew is crucial for identifying turning points in market cycles and managing systemic risk.