Bitcoin Experiences Short Squeeze, Surges Near $26,000 Amid Derivative Bet Unwinding
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Bitcoin Experiences Short Squeeze, Surges Near $26,000 Amid Derivative Bet Unwinding

In a dramatic turnaround, Bitcoin (BTC) surged close to $26,000 during Asian trading hours, reversing Monday’s dip to three-month lows below $25,000. This sudden rise appears to be driven by a short squeeze, which is essentially a rally fueled by the closing of bearish bets in the derivatives market.

The Short Squeeze Unveiled

As Bitcoin’s price shot up, the cumulative open interest in futures and perpetual swaps trading on major platforms like Binance, Bybit, OKX, and Deribit declined from $5.05 billion to $4.8 billion. Open interest represents the total value locked in active positions. This drop in open interest can be attributed to traders abandoning their bearish positions, coinciding with positive funding rates.

Funding rates are the costs associated with holding bullish or bearish positions in perpetual swaps (futures without an expiry date). Negative rates indicate a skew towards bearish leverage, while positive rates imply the opposite.

Market Sentiment and Potential Headwinds

While this price surge is impressive, Bitcoin’s recovery from the crucial support level at $25,000 may face limitations due to the absence of immediate bullish catalysts. The optimism surrounding a Bitcoin spot exchange-traded fund (ETF) has waned, with attention shifting to the impending liquidation of altcoin holdings by the troubled crypto exchange FTX.

Some market observers maintain a bearish outlook as long as prices remain below the 50-day simple moving average. Bitcoin is currently trading at $25,836, below the 50-day moving average of $27,731, indicating a bearish sentiment. Similarly, Ethereum (ETH) is trading at $1,617, below its 50-day moving average of $1,752, with a bearish trend.

Technical Analysis and Support Levels

Bitcoin experienced significant weakness as it briefly dropped below $25,000, marking its worst performance since mid-June. While it made a strong comeback of $1,000, it still faces resistance at the $26,000 level. On-chain analysis suggests that Bitcoin’s price may face a support test, as bid liquidity further down the order book has been removed.

Despite previous instances of “rug pulls,” where liquidity was cleared around the spot price, co-founder Keith Alan predicts that $24,750 will hold as support during downward moves.

Bullish Signals and Market Dynamics

Bitcoin dominance vs. BTC chart. 
| Credible Crypto
Bitcoin dominance vs. BTC chart | Credible Crypto

Some traders remain optimistic about Bitcoin’s future performance. Popular trader Credible Crypto suggests that a breakout in Bitcoin market cap dominance could precede the next bullish move in BTC’s price. Previous instances of a local dominance downtrend being tested have led to significant price gains.

In conclusion, Bitcoin’s recent surge near $26,000 reflects a short squeeze driven by the unwinding of bearish derivative bets. While this rebound is noteworthy, the absence of immediate catalysts and the looming FTX altcoin liquidation could limit further gains. Technical analysis points to key support and resistance levels, and some traders remain optimistic about Bitcoin’s future prospects.

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