Bitcoin's Fragile Recovery Raises Concerns of a Large-Scale Short-Squeeze Event

Bitcoin's Recovery Above $75,000 Faces Credibility Problem

Bitcoin's recent recovery above $75,000 has a credibility problem, as traders with the most leverage don't believe in it. Funding rates on perpetual futures, a gauge of whether leveraged traders are betting on higher or lower prices, have been negative for about 46 consecutive days. This is one of the longest bearish stretches on record, matching the streak from November to December 2022, when the implosion of crypto exchange FTX rocked the industry.

The kind of disconnect tends to resolve fast — and painfully for one side. If prices keep climbing, traders who've bet against the rally face mounting losses that can force them to buy back their positions all at once, sending prices sharply higher in a cascading effect known as a short squeeze. The longer the standoff persists, the bigger the potential unwind.

Traders are actively building short positions and betting against a breakout, creating conditions where a short squeeze becomes more likely if upward momentum persists. The split marks one of the widest gaps this year between what's happening in spot markets and what derivatives traders are positioning for. Bitcoin has rallied roughly 11% from its April low, buoyed in part by renewed buying in US-listed ETFs and sizable purchases from Michael Saylor's Bitcoin treasury firm Strategy.

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What makes the short positioning particularly precarious is the volume of bullish catalysts arriving at once — any of which could trigger the kind of price spike that forces bearish traders to cover. Meanwhile, Goldman Sachs Group Inc. this week filed for a Bitcoin ETF, its first direct push into the crypto investment space. And last week Morgan Stanley became the first major bank to launch its own Bitcoin-tracking ETF — a move that K33's Vetle Lunde called "monumental" despite modest initial flows, given that it carries the Morgan Stanley name.

US-listed Bitcoin ETFs have absorbed more than $800 million in the past week, a sharp reversal from outflows earlier this year. Each fresh wave of buying raises the cost for short sellers to maintain their positions, tightening the squeeze conditions the derivatives market has been building toward for weeks.

A break above $76,000 could see BTC extend toward $85,000, and a rally like that might catch some people off guard. Bitcoin traded around $75,000 on Thursday, which is still down 40% from its October high of around $126,000. Bearish investors can still end up on the profitable side of the trade if the latest uptick falls apart. Options traders are paying considerable premiums for downside protection with elevated levels of open interests around $60,000 and $50,000 put options, according to data from crypto exchange Deribit. Bitcoin may also face significant resistance on its way up as options dealers who are running market-neutral strategies sell into the rally, with the largest positions concentrated around $80,000.

Read also: Bitcoin's Inflation-Hedging Potential Erodes as Price Falls Below $70,000