Traders aggressively betting on further moves south for Bitcoin could be caught unawares in the coming days and weeks, with the derivatives market forming a setup primed for a short squeeze.
That’s according to research-led digital assets brokerage K33’s latest analysis, which found a mix of both negative perpetual swap funding rates in recent weeks and a spike in open interest.
“This suggests aggressive shorting, structurally creating a setup ripe for a short squeeze,” K33 analyst Vetle Lunde wrote in a note to investors on Tuesday.
A short squeeze happens when traders who bet that a stock or asset's price will go down—by shorting it—are forced to buy it back quickly as the price starts to rise instead.
The buying frenzy drives up the price even more, making it harder for others who bet against it to cover their positions without taking a significant loss.
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The strategy hinges its findings on the 7-day average funding rate, which has decreased since the market crash on August 5, hitting -2.53% on Tuesday. That’s the lowest it’s been since March 2023, Lunde wrote.
Funding rates are periodic payments made between traders in futures markets, specifically for perpetual contracts, which are a type of futures contract without an expiration date. The rates are used to keep the price of the perpetual contract in line with the spot price.
When the funding rate is positive, more traders betting on prices going up (long positions) pay a fee to those betting on prices going down (short positions). When the funding rate is negative, it reflects a larger number of traders betting on prices going down are paying a sizeable fee to those banking on prices going up.
Typically, when things are steady, the rate hovers around 10.95%, Lunde wrote. But when many people start betting aggressively, the rate can move from what’s expected, which normally shows more traders are piling into the same bet.
Hedge Bitcoin Exposure by Shorting Altcoins During Murky Market, Says Analyst
Bitcoin traders should hedge their BTC exposure by taking short positions in altcoin perpetual futures, according to 10X Research CEO Markus Thielen. While the traditional buy-and-hold strategy may no longer deliver substantial profits, this alternative approach offers traders a way to mitigate risks and capitalize on evolving market dynamics, he wrote. Thielen noted in a report Monday that Bitcoin's dominance has risen to 56% while altcoin dominance, excluding Ethereum (ETH) and stablecoins, ha...
Meanwhile, notional open interest over the last seven days has jumped to its most significant weekly recording in over a year, above 28,880 BTC.
“The current combination of surging open interest and negative 7-day average funding rates is unique and promising,” Lunde wrote.
High leverage and big discounts on perpetual contracts usually mean that a lot of people are betting against Bitcoin, which often leads to those bets running out of steam, the analyst added.
It's a sentiment echoed by Nansen in its latest research on Monday, which stated: "The panic selling that took hold of markets at the end of July is subsiding."
However, it did concede the crypto sell-offs of March and July have "negatively impacted investors’ risk appetite."
Mt. Gox Moves
The price of Bitcoin fell back below its $60,000 price tag on Tuesday ahead of significant moves from the Mt. Gox estate overseeing the return of billions of dollars to creditors affected by a decade-long hack.
Two large transactions, one worth $74 million and another valued at $784.2 million, were executed to unknown wallet addresses, data provided by blockchain analytics firm Arkham Intelligence shows.
While it's unclear what the transfers could mean, they represent the first significant shift in Mt. Gox’s Bitcoin holdings in over three weeks. Decrypt has reached out to Arkham to learn more.
Analysts Remain Bullish on Crypto for 2024 as Bitcoin Dips Below $59,000
Bitcoin failed to reclaim its $60,000 price tag on Sunday after climbing to just above that figure a day prior, even as investors drove broader market indices back toward record highs on Friday. The world's largest crypto by market capitalization rose to just above $60,330 on Saturday but has since fallen 1.7% to around $58,646, CoinGecko data shows. Despite the indecision in crypto, some analysts and investment trading desks remain optimistic for the remainder of the year. "We remain constructi...
In any case, the estate still controls some $2.7 billion worth of Bitcoin, which continues to be an overhang on market sentiment.
Since July, the market has seen a notable shift compared to the first half of 2024. Perpetual contracts, previously traded at or above the spot market price, are now discounted.
The trend reflects bearish sentiment amid Mt. Gox distributions and government sales while also hinting at potential signs of a slowdown in selling pressure, Lunde wrote.
Editor's note: Adds comments from Nansen.
