Analysts have noted signs of Bitcoin’s shortsqueeze forming. What does this mean for cryptocurrencies?
It may be dangerous to bet on Bitcoin’s continued decline. However, in trading the main cryptocurrency, the conditions necessary for a tangible upward price spurt are gradually forming. Such an event is usually called a short-squeeze: it is a forced liquidation of a large volume of short positions on open-ended futures, which leads to an active growth in the value of the asset. Experts expect such a scenario this time too.
Over the past month, the value of Bitcoin fell by 12.9 percent. However, the growth in the scale of the last year is at 127 per cent.
Changes in the Bitcoin rate over different time periods
Despite this, positive factors in the industry are also noticeable. For example, the total market capitalisation has reached a record level of $165 billion, and the growth of this indicator since the beginning of the year has already exceeded 20 percent.
The corresponding graph is given by CryptoQuant analysts.
Changes in the capitalisation of stablecoins against the background of the Bitcoin rate
This is a good trend, because stablecoins are a traditional bridge between the world of fiat and digital assets. Still, large investors contact issuers like Tether and Circle, pay them money and receive the corresponding amounts of tokens on the blockchain. These stacks are then predominantly used to purchase popular coins.
In the future, the total capitalisation rate of stables will clearly increase. For example, today Tether representatives announced the launch of such a token with a peg to the exchange rate of the United Arab Emirates dirham.
According to them, the novelty will provide users with a more efficient and transparent access to the specified currency and protection from fluctuations in the rates of various fiat currencies.
When will Bitcoin start to grow?
Information about a possible jump in the BTC chart was shared by analysts at K33 Research in their latest report. They concluded that the ace will be determined by a combination of a negative funding rate and an increase in the volume of open positions.
According to analyst Vetle Lunde, such a set-up indicates overconfidence of the bears who are betting too much on the continuation of the market collapse. Here is a rejoinder on the matter from Decrypt.
This suggests an aggressive shorting of Bitcoin, structurally setting the stage for a short-squeeze.
Hourly chart of the Bitcoin (BTC) exchange rate on the Binance exchange
A short-squeeze occurs when short position holders have to buy back their positions quickly as the market rebounds instead of collapsing, which is what traders were betting on. The buying frenzy causes the price to rise even more, causing exchanges to forcibly close the corresponding bear trades.
And since closing a short requires buying the underlying asset, it ends with an additional market jump that can lead to another wave of liquidation. Accordingly, in this case the growth of the industry creates conditions for an additional jump, which is called a short-squeeze.
In English, this word combination means short squeeze, which illustrates what is happening in such conditions.
Bitcoin funding rate
The seven-day average of the funding rate or so-called funding rate has declined since the market crash on 5 August. Specifically, the rate reached a level of -2.53 percent on Tuesday.
This is its lowest value since March 2023, indicating traders’ negative expectations of the niche and their calculation for the collapse of digital assets.
Funding is periodic payments made between traders of open-ended contracts, which are futures with no expiry date. Funding is used to keep the price of the perpetual contract in line with the spot price.
The volume of open positions in Bitcoin
When the funding rate is positive, holders of long positions or longs pay funds equal to the rate of the position volume to short holders who are expecting a market drawdown. Otherwise, it is the other way round – short holders pay long holders.
If the funding rate is negative for a long period of time, it indicates that more bears are willing to tolerate high deductions, counting on the continuation of BTC collapse. Eventually, however, such conditions may force position holders to close their positions. This, in turn, will lead to a kind of balance of the situation on the coin market.
The volume of open positions over the past seven days has jumped to its highest value in the past year, exceeding the equivalent of 28,880 BTC.
Lunde believes that all of the above creates a “favourable situation” for traders who are able to buy Bitcoin cheaper by 19 percent from its all-time high for the long term.
The current balance of Mt.Gox cryptocurrency exchange wallets
Traders should also keep a close eye on Mt.Gox’s financial flows. Today, the trustees of the collapsed crypto exchange conducted two transactions: for 13,264.8 bitcoins equivalent to $784 million and 1,265 BTC for $75 million.
The first portion of coins went to a new address, while the second appeared on the wallet of the Bitstamp trading platform. Such activity of the company’s representatives indicates the continuation of the distribution of BTC and BCH worth billions of dollars among former Mt.Gox customers, who suffered due to the collapse of the platform a decade ago. The distribution will last until 31 October 2024, which means that the wait is relatively short.
The analysts' idea is that the current collapse of the digital asset market has lasted long enough. Therefore, those wishing to earn on shorts become too greedy - the same situation is usually observed on the market during prolonged periods of growth. Therefore, the prospect of a sharp change of sentiment in the industry is quite possible. However, it will also depend on other important factors like what is happening in the world economy together with the approaching US presidential election.
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