Bitcoin Perpetual Open Interest Suggests Short Squeeze Led To Crash


Bitcoin’s crash last week was tough for the market. I’ve seen the digital asset lose its footing from where it was headed to just under $30,000 to collapse into the mid-$17,000 before the recovery started. With the new week, the market is starting to appear in the green. But as Bitcoin struggles to hold over $20,000, the question remains what led to such a crash.

short squeeze

Bitcoin open interest in perps has been high for the past two weeks. This continued to be the case during the market crash and subsequent recovery. However, the levels of open interest, especially the highs and lows, that preceded and during the bitcoin crash have all the makings of a short squeeze.

Related reading | By the Numbers: Worst Bitcoin Bear Market Ever

On Wednesday, open interest in Bitcoin finally peaked at a new all-time high of 335,000 BTC after a week of unexpected moves. This was when the price of Bitcoin dropped below $21,000. As the price of the digital asset began to recover, open interest in Perps quickly declined. Such movements are associated with a short squeeze, which is the same in the case. One preceded another crash over the weekend.

Bitcoin open interest

Open interest remains elevated | Source: Arcane Research

It was the same over the weekend. Open interest in perps rose again, this time to 325,000 BTC, after an erratic move when the price dropped to the mid-$17,000. Another drop in open interest was recorded as BTC price recovered, albeit slower this time.

Trade Bitcoin Perps at a Discount

Bitcoin traders are still trading at a discount compared to spot prices. This is not surprising given that the price of Bitcoin funding has remained neutral below neutral even during the crash and the heavy selling. In addition, nothing significant happened regarding bitcoin customers during the eventual crash and recovery,

Financing rates

Funding rates below neutral | Source: Arcane Research

Interestingly, funding rates are now below neutral as BTC price struggles above $20,000. One of the places where funding rates had the biggest impact was on Deribit. Since it is rumored to be closely intertwined with Three Arrows Capital (3AC), the drop in funding rates has fueled bankruptcy fears and rumors associated with the collapse of 3AC.

Related reading | Bitcoin miner liquidations threaten Bitcoin’s recovery

However, it is important to note that Deribit has assured the public that he remains financially healthy even if 3AC’s debt is forfeited. With the market starting to move from last week’s crash, funding rates are beginning to stabilize, although still slightly below neutral.

Bitcoin price chart from 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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