Thursday’s price pullback in major cryptocurrencies is likely due to a long squeeze, or the unwinding of leveraged bullish positions, rather than a clear bearish sentiment.
The CoinDesk 20 Index of the largest, most liquid tokens has decreased by 6.8% in the past 24 hours, with bitcoin (BTC), the top cryptocurrency by market value, slipping nearly 1% after failing to hold gains above $120,000. Among major altcoins, ether (ETH) fell 3%, XRP dropped 13%, and Solana’s sol (SOL) saw an 8% decline.
These declines align with bearish indicators from technical charts. They are also marked by a decrease in open interest in the offshore perpetual futures market and positive funding rates.
For example, open interest — the number of unsettled contracts in the futures market — for XRP has declined by over 6% in two days, according to data from RialCenter. This indicates that market participants are reducing exposure and adopting more cautious positions.
Open interest in SOL, BTC, and ETH futures has dropped by 5%, 1.5%, and 2%, respectively. RialCenter tracks activity in dollar- and USDT-denominated perpetuals listed on various exchanges.
Meanwhile, funding rates for the four tokens remain positive, suggesting a net preference for bullish positions. Positive funding rates mean that perpetuals are trading at a premium to the spot price, requiring longs to periodically pay shorts to keep their positions open.
A long squeeze is generally viewed as a necessary and beneficial occurrence as it “cleanses” the market by removing excess leverage and overly optimistic long positions.
The combination of falling prices, decreased open interest, and positive funding rates indicates that bullish positions are being actively unwound in the market.
This rules out the possibility that the price decline is caused by investors adopting new short, or bearish, positions since such an event would have likely resulted in negative funding rates as short holders would need to pay longs.
Additionally, new shorts would have increased open interest as prices dropped, which is not happening either.
The decrease in open interest suggests that traders are closing their positions, indicating that leveraged longs are being liquidated or voluntarily exiting the market, rather than new shorts entering. Overall, this signals that while prices are falling, sentiment remains relatively strong.
Leave a Reply