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In summary
- Traders who aggressively bet on Bitcoin’s downside moves could be caught off guard by a short squeeze, according to analysis from K33.
- The report noted that the combination of negative funding rates on perpetual swaps and a rise in open interest could trigger a “short squeeze.”
- Analyst Vetle Lunde of K33 wrote that the 7-day average funding rate decreased to -2.53%, the lowest figure since March 2023.
Traders aggressively betting on additional Bitcoin downside moves could be caught off guard in the coming days and weeks as the derivatives market is forming a setup conducive to a short squeeze.
This is based on the latest analysis from Cryptocurrency brokerage K33. The report notes that in recent weeks, the combination of negative funding rates on perpetual swaps and a surge in open interest could trigger a “short squeeze.”
“This suggests aggressive short selling, structurally creating a setup conducive to a short squeeze,” K33 analyst Vetle Lunde wrote in a note to investors on Tuesday.
A short squeeze occurs when traders who are betting that the price of a stock or asset will fall—by shorting—are forced to quickly buy back the price as the price begins to rise instead.
The buying spree drives the price up even further, making it difficult for others who bet against it to cover their positions without suffering significant losses.
The strategy is based on its findings on the 7-day average funding rate, which has declined since the market crash on August 5, reaching -2.53% on Tuesday. That is the lowest figure since March 2023, Lunde wrote.
Financing rates are periodic payments made between traders in the futures markets, specifically for perpetual contracts, which are a type of futures contract with no expiration date. The rates are used to keep the price of the perpetual contract aligned with the spot price.
When the funding rate is positive, more traders who bet that prices will rise (long positions) pay a fee to those who bet that prices will fall (short positions). When the funding rate is negative, it reflects that a larger number of traders who bet that prices will fall are paying a significant fee to those who bet that prices will rise.
Typically, when things are stable, the rate hovers around 10.95%, Lunde wrote. But when a lot of people start betting aggressively, the rate can move more than expected, which typically shows that more traders are piling in the same bet.
Meanwhile, notional open interest over the past seven days has risen to its highest weekly record in over a year, above 28,880 BTC.
“The current combination of rising open interest and negative 7-day average funding rates is unique and promising,” Lunde wrote.
High leverage and deep discounts on perpetual contracts typically mean that many people are betting against Bitcoin, often leading to those bets running out of gas, the analyst added.
This is a sentiment that Nansen reflected in his latest research on Monday, where he said: “The panic selling that gripped markets in late July is easing.”
However, he acknowledged that cryptocurrency sell-offs in March and July have “negatively impacted investors’ risk appetite.”
Mt. Gox movements
On Tuesday, the price of Bitcoin fell back below its $60,000 price tag ahead of significant moves by the Mt. Gox trust overseeing the repayment of billions of dollars to creditors affected by a decade-long hack.
Two large transactions, one worth $74 million and another valued at $784.2 million, were made to unknown wallet addresses, according to data provided by Blockchain analytics firm Arkham Intelligence.
While it’s unclear what the transfers might mean, they represent the first significant change in Mt. Gox’s Bitcoin holdings in over three weeks. Decrypt has reached out to Arkham for more information.
In any case, the trust still controls around $2.7 billion worth of Bitcoin, which remains a drag on market sentiment.
Since July, the market has seen a noticeable shift compared to the first half of 2024. Perpetual contracts, which previously traded at or above market price, are now discounted.
The trend reflects bearish sentiment due to Mt. Gox distributions and government sales, while also suggesting possible signs of a slowdown in selling pressure, Lunde wrote.
Editor’s note: We’ve added comments from Nansen.
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