Bitcoin Perpetual Open Interest Suggests Short Squeeze Leads to Crash

Last week’s Bitcoin crash was a brutal crash for the market. It saw the digital asset lose its footing, falling from a trend just below $30,000 to around $17,000 before recovering. With the new week, the market starts to turn green. But with Bitcoin struggling to sustain above $20,000, the question remains what triggered such a crash.

brief squeeze

Bitcoin’s open interest against perps has been rising over the past few weeks. This has been the case throughout the market crash and subsequent recovery. However, the level of open interest that led to the Bitcoin crash and during the crash, mostly up and down, has all the hallmarks of a bear squeeze.

Related reading | The Numbers: The Worst Bitcoin Bear Market Ever

On Wednesday, after a week of unpredictable moves, Bitcoin perpetual contract open interest finally reached a new all-time high of 335,000 BTC. This is when Bitcoin fell below $21,000. As the price of digital assets began to recover, the open interest of perpetual contracts dropped rapidly. Movements like this are associated with brief squeezes, and in this case as well. One happened before another crash over the weekend.

Open interest remains elevated | Source: Arcane Research

The same goes for weekends. Open interest on perpetual contracts surged again to 325,000 BTC after a volatile move when prices fell to around $17,000. Since then, as the price of BTC has recovered, open interest has fallen again, albeit at a slower pace this time.

Bitcoin Perps trades at a discount

Bitcoin perpetual contracts are still trading at a discount compared to spot prices. This is not surprising as Bitcoin funding rates have remained neutral to below neutral even after the crash and massive sell-off. Also, through the crash and eventual recovery, nothing major happened with the crime on Bitcoin,

Funding rate

Funding rates below neutral | Source: Arcane Research

Interestingly, the funding rate has now been below neutral as the price of BTC struggles above $20,000. One place where funding rates have had the biggest impact is Deribit. As it is rumored to be closely related to Three Arrows Capital (3AC), the decline in funding rates has sparked concerns about bankruptcy and rumors related to the collapse of 3AC.

Related reading | Bitcoin Miner Liquidation Threatens Bitcoin’s Recovery

It is worth noting, however, that Deribit has assured the public that it will remain financially healthy even if the 3AC debt is forfeited. Funding rates have begun to stabilise as the market begins to emerge from last week’s crash, although they remain slightly below neutral.

Bitcoin Price Chart by TradingView.com

BTC declines to mid-$20,000s | Source: BTCUSD on TradingView.com
Featured image from CNN International, charts from Arcane Research and TradingView.com

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