Bitcoin Short Squeeze on the Horizon?

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Recent analyses indicate that a short squeeze may be forming for Bitcoin. But what does this mean for the broader cryptocurrency market? Betting on Bitcoin’s continued decline could now be risky. Conditions appear to be aligning for a significant upward price movement, known as a short squeeze. This occurs when a large number of short positions in open-ended futures are forcibly liquidated, driving the asset’s price higher. Experts are predicting this scenario for Bitcoin. Over the last month, Bitcoin’s value has dropped by 12.9%. However, its growth rate over the past year stands at an impressive 127%.

Positive Factors in the Industry

Positive factors in the industry are also emerging. For example, the total market capitalization reached a record $165 billion, a 20% increase since the beginning of the year. Stablecoins play a crucial role here, acting as a bridge between fiat and digital assets. Large investors often approach issuers like Tether and Circle, exchanging fiat for tokens on the blockchain, which are then used to purchase popular cryptocurrencies. The total capitalization of stablecoins is expected to continue growing. Tether, for instance, recently launched a token pegged to the UAE dirham, offering more efficient and transparent access to this currency and protection from fiat currency fluctuations.

When Will Bitcoin Start to Rise?

K33 Research analysts recently shared insights on a potential surge in Bitcoin’s price. They suggest this will be determined by a combination of a negative funding rate and an increase in open positions. Analyst Vetle Lunde notes that such conditions indicate overconfidence among traders betting on further market declines. This aggressive shorting of Bitcoin sets the stage for a short squeeze. When short positions are quickly bought back as the market rebounds, the resulting buying frenzy drives prices even higher, forcing further liquidations and additional price jumps. The seven-day average funding rate has been declining since the market collapse on August 5, reaching -2.53%—its lowest since March 2023. This negative funding rate reflects traders’ bearish outlook and expectations for digital asset declines. Funding rates are periodic payments between traders of open-ended contracts, designed to keep perpetual contract prices aligned with spot prices. When negative for extended periods, it indicates a willingness among bears to tolerate high deductions, expecting further Bitcoin declines. Eventually, such conditions could force position closures, leading to market equilibrium.

Market Indicators and Trends

Over the past week, the volume of open positions surged to its highest level in a year, exceeding 28,880 BTC. Lunde believes these conditions create a “favorable situation” for traders looking to buy Bitcoin at a 19% discount from its all-time high for the long term. Traders should also monitor financial flows from Mt.Gox closely. Trustees of the collapsed exchange recently conducted two significant transactions, moving 13,264.8 BTC worth $784 million and 1,265 BTC worth $75 million. This activity indicates ongoing distribution of BTC and BCH worth billions to former Mt.Gox customers, set to continue until October 31, 2024.