(Bloomberg) — A signal from the bitcoin derivatives market points to the growing risk of a “short squeeze” that could fuel sharp rallies in the largest digital assets, cryptocurrency specialist K33 Research said.
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The metric is the funding rate for Bitcoin perpetual futures, which helps gauge how bullish or bearish speculators are. K33 said the seven-day average annual funding rate on Aug. 20 was the lowest since March 2023 — when U.S. bank failures rattled investors — suggesting a prevalence of downside bets.
“Perpetual swap funding rates have averaged negative levels over the past week, while open interest has increased sharply,” K33 analysts Vetle Lunde and David Zimmerman wrote in a note. “This suggests aggressive shorting, which structurally creates a setup ripe for a short squeeze.”
In such a tight environment, surprise price jumps force fast-money traders to take out bearish bets, fueling the bounce. The mood in the Bitcoin market has been bleak lately, with the digital asset having suffered losses in August and struggling to stay above the $60,000 level. Meanwhile, a global stock index has rebounded to a record high and gold has hit new highs.
K33 said notional open interest — or outstanding contracts — in the perpetuals market rose by the equivalent of nearly 29,000 bitcoin over the past week. The seven-day average annual financing rate on Aug. 20 was minus 2.5%. Such rapidly rising open interest alongside a negative financing rate is a relatively rare occurrence, Lunde and Zimmerman said.
Perpetual futures are popular with crypto speculators because they don’t have a fixed expiration date. Activity has also increased in the more traditional Bitcoin futures market, hosted by Chicago-based CME Group Inc., which could signal renewed involvement from U.S. institutional investors.
Bitcoin has been dragged down recently by concerns that the U.S. government is selling off seized tokens. Traders are also awaiting a key speech from Federal Reserve Chairman Jerome Powell, whose signals about expected rate cuts could cause volatility. The token was steady at $59,550 as of 7:12 a.m. Wednesday in London, some $14,250 below its all-time high in March.
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