A recent analysis from cryptocurrency expert K33 Research highlights a growing risk of a “short squeeze” in the Bitcoin derivatives market, which could trigger significant price surges for the leading digital asset.
The focus is on the funding rate for Bitcoin perpetual futures, a key indicator of market sentiment. As of August 20, this rate was the lowest since March 2023, a period marked by turmoil following U.S. bank failures. This drop signals an increase in bearish bets against Bitcoin.
K33 analysts Vetle Lunde and David Zimmerman noted in their report that the seven-day average annualized funding rate was at a negative 2.5%, reflecting a trend of increased short selling coupled with a rise in open interest. “Perpetual swap funding rates have averaged at negative levels over the past week, while open interest has sharply increased,” the analysts wrote. “This suggests aggressive shorting, structurally creating a setup ripe for a short squeeze.”
A short squeeze occurs when unexpected price increases compel traders who have bet against Bitcoin to cover their positions, exacerbating the price rally. Bitcoin’s recent performance has been lackluster, with the cryptocurrency struggling to maintain levels above $60,000 and suffering losses in August. In contrast, global stock indices have rebounded to near record highs, and gold has reached new peaks.
K33 reported that notional open interest in the perpetual futures market surged by the equivalent of nearly 29,000 Bitcoin over the past week. Lunde and Zimmerman pointed out that this significant increase in open interest alongside a negative funding rate is a rare market scenario.
Perpetual futures, which do not have a set expiration date, are a popular instrument among crypto speculators. Activity is also rising in the traditional Bitcoin futures market managed by CME Group Inc., possibly indicating renewed interest from U.S. institutional investors.
Bitcoin has recently faced pressure from concerns over the U.S. government potentially selling seized tokens and anticipations surrounding an upcoming speech by Federal Reserve Chair Jerome Powell. Traders are keenly awaiting Powell’s comments, which could influence market volatility. As of 7:12 a.m. Wednesday in London, Bitcoin was steady at $59,550, approximately $14,250 below its all-time high from March.
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