Bitcoin's Potential Short Squeeze: 3 Key Indicators to Watch
Bitcoin (BTC) is undergoing a turbulent start to the year, with notable fluctuations in January. The cryptocurrency surged to nearly a four-week peak before briefly dipping below $90,000.
Amid these price swings, analysts have identified crucial indicators that could hint at an impending short squeeze.
Bitcoin Derivatives Signal Elevated Short Squeeze Risk
According to data from BeInCrypto Markets, Bitcoin posted gains for the first five days of January, climbing past $95,000 before reversing. On January 8, BTC fell below $90,000, hitting a low of $89,253 on Binance, and was trading at $91,078 at the time of writing, a 0.157% daily increase.
Three indicators suggest market conditions may favor a potential short squeeze, a scenario where prices rise against bearish bets, forcing traders to cover short positions, fueling further price increases.
1. Negative Funding Rate Signals Bearish Sentiment
Binance's Bitcoin funding rate has turned negative, indicating bearish sentiment. Analyst Burak Kesmeci noted this shift as the first since November 2025, with the rate now at -0.002, deeper than the previous -0.0002. This suggests a stronger bearish outlook among derivatives traders.
"Funding is more deeply negative, while price remains under pressure. This increases the probability of a stronger short squeeze," Kesmeci wrote.
2. Rising Open Interest Amid Price Drops
Analysts have observed that while Bitcoin's price trends lower, Open Interest is climbing, hinting at a potential short squeeze. This reflects the number of outstanding derivative contracts, suggesting new positions are opening in the direction of the price move, often signaling increased short exposure.
"This is a textbook sign of an incoming Short Squeeze!," a post highlighted.
3. High Leverage Heightens Liquidation Risks
Bitcoin's Estimated Leverage Ratio has reached a one-month high, indicating increased risk as traders use borrowed capital. High leverage can amplify gains and losses, making the market vulnerable to rapid liquidations if prices rebound.
With these indicators converging, Bitcoin could be poised for a sharp upward move if a price rebound triggers cascading liquidations among overleveraged short positions. However, the realization of a short squeeze depends on broader market catalysts, such as macroeconomic factors and market demand.