Bitcoin Shorts Are Piling Up, Liquidation Squeeze Soon?

Data shows Bitcoin funding rates have turned negative recently, suggesting that shorts are accumulating on the market. Will a squeeze follow?

Bitcoin Funding Rates Are At Their Most Negative Since December 2022

As an analyst in a CryptoQuant post pointed out, the market sentiment is currently turning bearish. The relevant indicator here is the “funding rate,” which measures the periodic fee that long and short traders on the futures market are currently exchanging with each other.

When the value of this metric is positive, it means long holders are currently paying a premium to the short holders to keep their positions. Such a trend suggests the majority of traders are bullish right now.

On the other hand, the indicator’s negative value implies the shorts pay the fee. Naturally, this is a sign that investors are currently bearish.

Now, here is a chart that displays the trend in the 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 above graph shows that the Bitcoin funding rate has usually had a positive value during the last few months. This suggests that as the rally in the asset price has taken place, investors in the futures market have turned bullish as they are betting on higher and higher prices.

However, there have been a few instances where the indicator’s value turned red. A notable example was during the first half of February when the rally stopped, and the price plunged.

In these local lows in the middle of the rally, the funding rates had become negative, implying that holders had started believing that the price rise had ended and would be all downhill.

The decrease, however, turned out to only be temporary, and the price shot back up. As a result of this sudden movement in the price, the shorts that had amassed in the market were wiped out in a liquidation squeeze fueling the price higher.

A “liquidation squeeze” is when a sudden price swing flushes many positions simultaneously. These liquidations, in turn, only fuel further the price move that caused them, which then causes even more liquidations, and so on. In this way, mass liquidations can cascade together 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 of the funding rate turning negative during this rally, and both coincided with local floors in the price, suggesting that the liquidations may have helped the price in each case.

Recently, the funding rates have turned negative once again. This time the values are even deeper than any of the instances above, and the current levels of the indicator are the most negative since December 2022.

Whether these shorts accumulated in the market will get squeezed this time or if the current funding rates reflect a real market mindset change for Bitcoin remains to be seen.

BTC Price

At the time of writing, Bitcoin is trading around $22,500, down 4% in the last week.

BTC moves sideways | Source: BTCUSD on TradingView

Featured image from Dmitry Demidko on Unsplash.com, charts from TradingView.com, CryptoQuant.com