Signal of Bitcoin Short Squeeze: What a 30% Drop in Open Interest Means

According to market analysis revealed through Cointelegraph data on January 15, the changes in the Bitcoin derivatives market are showing signs of a short squeeze. According to CryptoQuant information, Bitcoin’s open interest has recently significantly decreased, and it is necessary to examine what signals this movement is sending to the market. Currently, BTC is trading around $89.32K with a 24-hour change of -2.04%.

Sharp Drop in Open Interest Signals Excessive Leverage Liquidation

Analysis shows that the size of Bitcoin’s open interest has decreased by approximately 30% since October last year. This is interpreted not as a simple market contraction but as a sign of strategic change. Especially, the downward trend from the all-time high of $15 billion recorded on October 6, 2024, indicates that the excessive leverage accumulated in the market is being systematically unwound.

Analysts refer to this as a “leverage reduction signal,” viewing it as a positive sign that excessive market positions are being cleared. Historically, a decrease in open interest of a similar scale has formed important market lows and demonstrated patterns that laid the groundwork for a full-fledged bull market.

Chain Reaction of Short Position Liquidations

The phenomenon of decreasing open interest even as spot prices rise reflects specific mechanisms at play. It suggests that short squeezes are causing leveraged short positions to be liquidated in succession.

In the derivatives market, when Bitcoin prices rise, short position holders who cannot withstand losses are forced to close or are forcibly liquidated. This liquidation process generates additional buy demand, creating a feedback loop that further drives prices upward. Importantly, current price increases are believed to be driven more by spot buying than by speculative leverage, indicating a more solid market foundation.

Laying the Groundwork for a Bullish Rebound, but Confirmation Needed

The decrease in open interest and the short squeeze phenomenon are signals that the market is preparing for a full-scale bullish recovery. Past cases show that this phase of leverage unwinding was an essential step before entering an upward trend.

However, derivatives analysis expert Greeks Live offers a cautious assessment of the current market structure. They state that the derivatives market has not yet fully entered a bullish phase structurally, and the current trading structure is closer to a passive response to sharp price fluctuations.

Additionally, if Bitcoin prices continue to decline, open interest could decrease further, potentially leading to more severe leverage liquidations and a long-term adjustment phase. Ultimately, whether the current short squeeze signals mark the start of a genuine bullish rebound or are merely a temporary rally will depend on future price movements and the additional trends in open interest.