On-chain data shows the Bitcoin open interest has been rapidly going up with the price, a sign that a long squeeze may be brewing in the market.
Bitcoin Open Interest Has Seen Sharp Rise Recently
As pointed out by an analyst in a CryptoQuant post, the funding rates are also highly positive right now. The “open interest” is an indicator that measures the total amount of Bitcoin futures contracts that are currently open on derivative exchanges. This metric accounts for both short and long contracts.
When the value of this metric displays a rise, it means BTC investors are opening up new positions in the futures market right now. Since more derivative positions generally also imply an increase in leverage in the market, this kind of trend can lead to the asset’s price turning more volatile.
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On the other hand, the indicator showing a decrease suggests the holders are closing their futures positions or are getting liquidated by exchanges. Naturally, the value of the cryptocurrency can become lower following this trend.
Now, here is a chart that shows the trend in the 30-day simple moving average (SMA) Bitcoin open interest over the past week or so:
The 30-day SMA value of the metric seems to have shot up in recent days | Source: CryptoQuant
As shown in the above graph, the 30-day SMA Bitcoin open interest has observed some pretty rapid increase in the last couple of days as the asset’s price has shown sharp upwards momentum.
The metric’s value is now about $8.6 billion, which is the highest it has been since around a week ago. Interestingly, when that spike in the indicator took place, the price and the metric, both, fell sharply shortly after.
The open interest generally decreases so rapidly during mass liquidation events called “squeezes.” These usually take place when a sharp swing in the price occurs while the futures market has a large amount of leverage piled up.
Such a price move liquidates a huge number of derivative positions at once, and these liquidations only end up fueling said price move further. Naturally, this amplified price swing causes even more liquidations, and so, in this way, liquidations can cascade together like a waterfall. These mass liquidations are also the main reason why an overleveraged market can show high volatility.
Now, a way to know which direction might a near future squeeze be more probable (that is, if it will involve longs or shorts) is through the Bitcoin funding rate indicator.
This metric provides us with hints about which way the market is more heavily dominated right now. The below chart shows the recent trend in the 30-day SMA of this indicator.
Looks like the metric has been highly positive recently | Source: CryptoQuant
From the chart, it’s visible that the Bitcoin funding rate has a relatively high positive value currently, implying that there are more long positions than short ones. Squeezes are usually more likely to involve the more dominant positions in the market, meaning that if a squeeze takes place now, it could possibly be a long one.
This would naturally be bearish for the price of the cryptocurrency, at least in the short term, as long squeezes generally come with a sharp drawdown in the price.
BTC Price
At the time of writing, Bitcoin is trading around $28,600, up 4% in the last week.
BTC has shot up recently | Source: BTCUSD on TradingView