Bitcoin Shorts Are Piling Up, Liquidation Squeeze Soon?
Data shows that Bitcoin funding rates have turned negative recently, suggesting that shorts are building up in the market. Will there be a squeeze?
Bitcoin Funding Rates Are Most Negative Since December 2022
As one analyst pointed out in a CryptoQuant post, market sentiment is currently turning bearish. The relevant indicator here is the “funding rate”, which measures the periodic rate that long and short traders in the futures market are exchanging with each other.
When the value of this metric is positive, it means that long holders are paying a premium to short holders to hold their positions. This trend suggests that most traders are bullish at the moment.
On the other hand, the negative value of the indicator implies that the shorts pay the fee. Naturally, this is a sign that investors are bearish.
Now, here’s a graph that shows the trend in Bitcoin funding rates over the last few months:
Looks like the value of the metric has been quite negative in recent days | Source: CryptoQuant
The graph above shows that Bitcoin’s funding rate has generally been in a positive value during the last few months. This suggests that, as asset prices rose, investors in the futures market became optimistic, as they bet on ever-higher prices.
However, there were some cases where the indicator value turned red. A notable example was during the first half of February, when the rally stalled and the price plummeted.
At these mid-rally local lows, funding rates turned negative, implying that holders began to believe that the price increase was over and everything would be on the decline.
The drop, however, turned out to be only temporary and the price rose again. As a result of this sudden move in price, the accumulated shorts in the market were wiped out in a sell-off squeeze that fueled the price higher.
A “liquidation squeeze” occurs when a sudden price swing releases many positions simultaneously. These selloffs, in turn, just further fuel the price movement that caused them, which causes even more selloffs, and so on. In this way, mass liquidations can cascade during a squeeze.
In this case, as the squeeze involved short holders, it was an example of a “short squeeze”. There were two other instances where the funding rate turned negative during this rally, and both coincided with local lows in price, suggesting that sell-offs may have helped price in each case.
Recently, funding rates turned negative again. This time, the values are even deeper than any of the above instances, and the indicator’s current levels are the most negative since December 2022.
Whether these accumulated shorts in the market will be squeezed out this time around, or whether current funding rates reflect an actual shift in market mindset for Bitcoin remains to be seen.
At the time of writing, Bitcoin is trading around $22,500, down 4% over the past week.
BTC moves sideways | Source: BTCUSD on TradingView
Featured Image of Dmitry Demidko at Unsplash.com, Charts by TradingView.com, CryptoQuant.com