The Bitcoin derivatives market is sending a signal that could potentially lead to a “short squeeze” in the largest digital asset, according to cryptocurrency specialist K33 Research. This phenomenon could result in sharp rallies in the price of Bitcoin, catching many traders off guard.
The metric being closely monitored by K33 Research is the funding rate for Bitcoin perpetual futures. This rate helps to determine the sentiment of speculators in the market, whether they are bullish or bearish. According to K33, the seven-day average annualized funding rate on August 20 was at its lowest since March 2023, a time when US bank failures caused significant turmoil in the financial markets. This low funding rate indicates a prevalence of downside wagers, suggesting that traders are heavily betting against Bitcoin.
Analysts at K33, Vetle Lunde and David Zimmerman, noted that perpetual swap funding rates have been consistently negative over the past week, while open interest in the market has seen a sharp increase. This combination of factors creates a setup that is ripe for a short squeeze, where sudden price spikes force traders with bearish positions to cover their bets, leading to a rapid upward movement in the price of Bitcoin.
Despite the potential for a short squeeze, the mood in the Bitcoin market has been somber as the digital asset has been struggling to maintain its price above the $60,000 level. In contrast, global stock markets have been rallying towards record highs, and gold prices have been hitting new peaks. This divergence in performance across different asset classes adds to the uncertainty in the market.
K33 also highlighted the significant rise in notional open interest in the perpetuals market, equivalent to almost 29,000 Bitcoin over the past week. Additionally, the seven-day average annualized funding rate on August 20 was at a negative 2.5%, a rare occurrence when coupled with rapidly increasing open interest. This unusual combination of factors suggests that a short squeeze could be imminent.
Perpetual futures are a popular choice among speculators in the cryptocurrency sector due to their lack of a set expiry date. Activity has also been increasing in the more traditional Bitcoin futures market offered by Chicago-based CME Group Inc., indicating potential re-engagement by institutional investors in the US.
Recent concerns about the US government selling seized tokens and anticipation of a key speech by Federal Reserve Chair Jerome Powell have added to the volatility in the Bitcoin market. As of the latest data, Bitcoin was trading at $59,550, significantly below its all-time high of $73,800 in March.
In conclusion, the Bitcoin derivatives market is showing signs of a potential short squeeze, which could lead to sharp price rallies in the digital asset. Traders should closely monitor the funding rates and open interest in the market to gauge the likelihood of a short squeeze occurring. The current market conditions are uncertain, with various factors contributing to the volatility in the price of Bitcoin.
