Bitcoin Shorts Pile Up, Liquidation Pressure Soon?

Data shows Bitcoin funding rates have turned negative recently, suggesting shorts are piling up in the market. Will a hug follow?

Bitcoin funding rates are at their most negative since December 2022

As one 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 in the futures market currently exchange with each other.

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

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

Now, here’s a chart showing the trend in Bitcoin funding rates over the past few months:

Looks like the value of the metric has been quite negative in recent days | Source: CryptoQuant

The graph above shows that the Bitcoin funding rate has generally had a positive value in recent months. This suggests that as the rise in asset prices has taken place, investors in the futures market have become bullish as they bid for higher and higher prices.

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

At these local mid-rally lows, funding rates had turned negative, suggesting that holders had begun to believe the rally was over and would be downhill.

However, the decline proved to be only temporary, and the price shot up again. As a result of this sudden movement in price, the shorts that had accumulated in the market were wiped out in a liquidation squeeze that drove the price higher.

A “liquidation squeeze” is when a sudden price swing flushes out many positions at once. These liquidations, in turn, only further accelerate the price movement that caused them, which then causes even more liquidations, and so on. In this way, mass liquidations can flow together under a squeeze.

In this case, when 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, financing rates have again become negative. This time the values ​​are even deeper than any of the above cases and the current levels of the indicator are the most negative since December 2022.

It remains to be seen if these shorts that have accumulated in the market will come to grips this time, or if the current funding rates reflect a real change in the market mindset for Bitcoin.

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 at Unsplash.com, Charts from TradingView.com, CryptoQuant.com