Bitcoin's Short Squeeze Propels Prices Beyond $26,000

A short squeeze occurs when a surge in prices is driven by the closing of bearish positions. Bitcoin (BTC) witnessed a rapid climb to nearly $26,000 during the Asian trading session on Tuesday, marking a reversal from Monday's slump to a three-month low below $25,000. This upward movement is indicative of a short squeeze, fueled by the unwinding of bearish bets in the derivatives market.

As the prices surged, the total open interest in futures and perpetual swaps trading on exchanges like Binance, Bybit, OKX, and Deribit dropped from $5.05 billion to $4.8 billion. Open interest quantifies the dollar amount tied up in active or outstanding positions.

The decrease in open interest appears to be a result of short-sellers abandoning their pessimistic positions, coinciding with a shift in funding rates to positive territory. Funding rates pertain to the expenses linked with holding bullish or bearish positions in perpetual swaps, which are futures contracts without an expiration date. Negative rates suggest a prevailing bias toward bearish leverage, while positive rates indicate the opposite.

Pseudonymous trader and analyst @52kskew characterized the situation as a "textbook short squeeze."

On Monday, both Bitcoin and alternative cryptocurrencies (altcoins) experienced a decline, driven by concerns of potential sell-offs from the financially troubled crypto exchange FTX, which led to a downturn in market sentiment.


As open interest declined and funding rates shifted into positive territory, prices experienced an upward surge. (Velo Data)  

While the recovery from the critical support level at $25,000 is noteworthy, it may encounter resistance due to a lack of immediate bullish catalysts. The optimism surrounding a Bitcoin spot ETF has waned, with attention shifting towards the forthcoming liquidation of FTX's holdings in altcoins.

According to some observers, the prevailing bias remains bearish as long as prices remain below the 50-day simple moving average.

Markus Thielen, from crypto services provider Matrixport, noted, "Bitcoin's current price of $25,836 is below the 50-day moving average of $27,731 - which is a bearish signal. Additionally, the week-over-week price has decreased by 0.5%. As for Ethereum (ETH), its price of $1,617 is below the 50-day moving average of $1,752 - another bearish indication. Overall, the trend is downward, signaling a bearish sentiment."