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Bitcoin returns to $42K as bets start favouring ‘short squeeze’ higher for BTC

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On Jan. 11, Bitcoin (BTC) went past $42,000, raising hopes of a new “short squeeze”.

BTC/USD 1-hour candle chart (Bitstamp). Source: TradingView

Short-term squeeze “reasonably likely”

BTC/USD recovered from Monday’s drop to $39,600, its first breach of the $40,000 level since September, according to data.

While short-term optimistic forecasts were glaringly lacking on the day, attention was drawn to the possibility of another “short squeeze” in derivatives markets.

With open interest near all-time highs despite the drop and sentiment obviously favouring more downside, an unexpected increase might “squeeze” short positions while bringing solace to bulls.

Such an event is long overdue, according to Glassnode‘s weekly newsletter, The Week Onchain. Longs have been losing money virtually nonstop since November’s all-time highs of $69,000. And “squeezes” happen when the market isn’t expecting a specific outcome.

“Short traders who haven’t been penalised for taking on more risk may find themselves candidates for a near-term squeeze,” analysts predict.

According to Glassnode, “tepid” demand for spot BTC and futures open interest leverage, which is reaching 2% of the Bitcoin market size, might amplify such an event.

“When combined with extremely oversold signs in on-chain spending activity. This suggests a short squeeze is a relatively likely near-term market resolution,” the newsletter stated.

Bitcoin futures open interest leverage ratio annotated chart. Source: Glassnode

For every short, there’s a long

In the meantime, analysts discussed options to the high open interest being eliminated via a second step down to $30,000.

There is yet to be a “wipeout” of open interest. However, the popular Twitter account Credible Crypto claimed on the day that a surprise upside move might be the event that resets market composition.

In response to data from fellow analyst William Clemente, he posed the question. “What if the massive OI wipeout everyone is hoping for happens due to an upside squeeze rather than a move farther down?”

“This occurred in August of 21 when we began to climb out of the 30K rut. We’ll almost certainly see that again. The bears are on the verge of being wiped out.”

Bitcoin futures open interest chart (Binance). Source: Coinglass
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