Bitcoin (BTC) ready to punish bears: what if the short squeeze is coming?

The big short … press ? – Bitcoin is hovering around $40,000 and remains bearish if we look at the short term. Buyers will need to show up to turn the trend daily. Bitcoin is falling, of course, but it is possible that it is preparing a large-scale movement for us as we witnessed at the end of July 2021. Bitcoin had risen by 45% in just nine days. Is it possible to see an equivalent movement in a few weeks? Are we witnessing a bearish trap? A scenario that could appeal to investors…

This bitcoin price analysis (BTC) is offered to you in collaboration with the Coin trading and its algorithmic trading solution finally accessible to individuals.

Bitcoin and leverage effects

To understand the scenario considered in this article, it is necessary to understand some technical aspects.

Most of the time, an investor buys their bitcoins on the spot market. It is simply the place, on a platform, which allows the purchase or sale of Bitcoin. If I buy bitcoin in the spot market, I own bitcoin, and I can sell or store it however I want.

Some traders use leverage. For this, traders use what is called the Margin of negociation. It is an activity in its own right, and still very different from the spot. To better understand leverage, let’s take an example:

Paul wants to use x2 leverage. He deposits 100 euros on the margin trading platform. The platform lends him 100 euros. He then speculates with 200 euros. Two choices are available to him: procurement (long) or the sale (short).

  • the long : if an actor is placed long, he believes that the price will go up. A liquidation price is automatically created below its entry price. If the price drops and reaches the liquidation price, the position is sold and you lose your initial bet.
  • the short : if an actor places himself in shorts, he estimates that the price will fall. A liquidation price is automatically created above its entry price. If the price goes up and reaches the closeout price, the position is bought. A short position liquidation triggers a buy, which allows prices to rise.

When a lot of players bet on the downside or upward with leverage, there is a creation of cash areas. Remember, this liquidity is directly created when opening a position, whether short or long. The market likes to move to these cash. In this way, large portfolios can open positions easily. This is why the market often moves in the opposite direction of the majority.

July 2021: short squeeze, Bitcoin explodes on the rise

Remember, at the end of July 2021, the price of Bitcoin was just under $ 30,000… and only nine days later at $ 42,000.

What happened ?

There was what is called a short press. This is a powerful bullish move that liquidates a lot of short positions and pushes prices up. A liquidated short is a triggered purchase.

There is a way to find out the number of long and short positions. This tool is called theopen interest. This tool simply measures the openings and closings of positions in these derivative contracts. When it increases, positions are open and when it decreases, positions are closed.

the financing rate is a different tool that identifies whether players are mostly in longs or shorts. A commission is paid by the players when opening positions. When the funding rate is negative, sellers (shorts) pay these fees to buyers (longs), and vice versa. Here is a summary of what to remember from these two tools:

Table of possible deductions about two indicators: Open Interest (OI) and Funding Rate.

Here we will study Binance’s perpetual contract during the July 2021 short squeeze:

Chart illustrating Bitcoin's short squeeze from May to August 2021
Chart of Bitcoin and Open Interest during the short squeeze in July 2021

The July 2021 short squeeze can therefore be described in two stages:

  • Open Interest rises above resistance (green), as Bitcoin price falls. This means that the players are opening a lot of positions as the price goes down. The market liquidates very few (long) buyers as open interest continues to rise.
  • The price rebounds and goes from $30,000 to $42,000 in nine days. At the same time, open interest is falling sharply. Actors in shorts get liquidated. Open interest finds a support (green) on which it will then rebound.

Today, we know that it was a short squeeze as the price rebounded from the support at $ 30,000 and open interest fell sharply to around $ 42,000. That said, keep in mind that open interest only shows the opening and closing of positions. We could not know, with this tool alone, if it was mostly long or shorts.

At that time, the funding rate was negative throughout the fall in the price of Bitcoin from May to the end of July. This tool went in the direction of a high probability of short squeeze.

New Bitcoin Squeeze Short Coming?

Let’s take a look at the current situation on the Binance Bitcoin perpetual contract:

Potential short squeeze on Bitcoin with high open interest and falling price.
Chart of Bitcoin and open interest at the start of 2022

The price drops from the local top found on November 10, 2021. However, at the beginning of December, open interest began to increase sharply. It stands on higher again. Clearly, there have never been so many open positions on this contract. We are therefore in a similar situation to July 2021. This can therefore mean two things:

  • The players are mainly in longs and continue to open positions in longs, despite the fact that the price is falling. The liquidation price for lowering open interest is below $ 40,000. In this case, a huge downward move is to be expected.
  • The players are mostly in shorts and continue to open positions believing that the price will continue to fall. In this case, to bring down the open interest, the price of Bitcoin will have to rise sharply.

During the short squeeze in July 2021, we had a negative funding rate, which suggested that there were a lot of open short positions on the market. Here the funding rate is neutral and has started to be negative for a few days. It is more difficult to draw conclusions.

There is no certainty that a short squeeze will happen again in a few weeks or months. Moreover, there are never any certainties on the financial markets in general. We find ourselves in a situation that looks like the end of July 2021, but what happened then, of course, will not necessarily happen again. Open interest has never been higher on Binance’s Bitcoin perpetual contract. One thing is certain, there will be volatility in the coming weeks..

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