Are Bitcoin Derivatives Traders Setting Themselves Up for a Squeeze?
The Bitcoin derivatives market is indicating the possibility of a “short squeeze” on the horizon, as noted by cryptocurrency specialist K33 Research. K33 analysts Vetle Lunde and David Zimmerman have highlighted the funding rate for Bitcoin perpetual futures as a critical indicator of market sentiment.
The funding rate for Bitcoin perpetual futures, which reflects the level of bullish or bearish sentiment among speculators, has dropped to its lowest level since March 2023. This, combined with a significant increase in open interest in the perpetuals market, suggests a growing prevalence of downside wagers and aggressive shorting activity. Lunde and Zimmerman assert that this sets the stage for a potential short squeeze, where a sudden increase in prices compels traders with bearish positions to cover their bets, intensifying upward momentum.
The atmosphere in the Bitcoin market has been subdued, with the cryptocurrency experiencing losses in August and struggling to maintain its position above the $60,000 mark. On the other hand, global stock markets are showing signs of recovery and gold is reaching new highs, creating a contrasting landscape for various asset classes.
Notional open interest in the perpetuals market has surged, indicating a significant influx of new contracts. The seven-day average annualized funding rate, which was at minus 2.5% as of August 20th, is an unusual occurrence given the rapid growth in open interest. Perpetual futures, which have no set expiry date, have gained popularity among cryptocurrency speculators. Additionally, activity in the more traditional Bitcoin futures market offered by Chicago-based CME Group Inc. has been increasing, potentially signaling renewed interest from institutional investors in the US.
Recent concerns about the US government selling seized tokens have added to the negative sentiment surrounding Bitcoin, compounding the market’s challenges. Furthermore, traders are anxiously awaiting a crucial speech by Federal Reserve Chair Jerome Powell, the outcome of which could lead to heightened volatility based on signals regarding expected interest rate adjustments. As of Wednesday morning in London, Bitcoin was trading at $59,550, significantly below its all-time high of $73,800 reached in March 2023.
In conclusion, the Bitcoin derivatives market is showing indications that point to a potential short squeeze scenario. Traders and investors will need to closely monitor market developments and be prepared for the potential impact of a sudden shift in sentiment.
Source: Bloomberg L.P.
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