Valdrin Tahiri
·3 min read
BeInCrypto –
A look at on-chain indicators for Bitcoin (BTC), more specifically funding rates and open interest in order to determine what caused the short squeeze of July 26.
The negative funding rates and high levels of open interest were likely the catalysts for the July 26 short squeeze.
What is the funding rate?
Funding rates are a measure of the payment that futures trades are obliged to pay in order to keep their positions open. They are expressed in percentage terms.
If the funding rate is negative, it stipulates that traders with short positions are obliged to pay the funding rate to those with long positions. The opposite holds true for positive funding rates.
As an indicator, the funding rate can be used to determine the sentiment of the market. For example, negative funding rates are a sign of a negative sentiment. This is because traders have such strong beliefs that the market is going down that they are paying a premium in order to short it.
However, extreme values can often be seen as a sign of euphoria, marking bottoms or tops, depending on whether the funding rate is negative or positive.
Funding rates in July
The funding rates have been negative for the majority of the past 30 days. They culminated with a low of -0.0225% on July 25. This occurred the very day prior to the short squeeze.
While the BTC price had actually been increasing since July 20, the rate of increase greatly accelerated on July 26.
The funding rate turned positive on July 26, fell back to negative territory the next day, but has turned positive once more.
Futures open interest also reached a peak of $13.708 Billion on July 25. This is likely to have been mostly on the short sides, since the increased interest in shorting caused the funding rates to go negative. This perfectly set up the table for a short-squeeze.
Open interest has been decreasing since.
Well-known investment officer @mskvsk also noted that funding rates have finally turned positive.
Furthermore, he showed that miner accounts have been consistently accumulating in May despite the negative sentiment in the market. This shows that the conviction of long-term holders for the market is still strong.
Source: Twitter
Liquidations
Since the bulk of the increase transpired in the early hours of July 26, the majority of liquidations occurred that same day
July 26 measured $219 million in liquidations of short positions, more than seven times higher than the figure from the previous day.
Finally, the future’s estimated leverage ratio has finally reset after spiking considerably on July 20 and 25. It measures the ratio between open interest on an exchange and the balance of that exchange.
It was 0.176 on July 25, and has fallen to 0.15 since.
For BeInCrypto’s latest bitcoin (BTC) analysis, click here.
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As a seasoned expert in cryptocurrency markets and blockchain technology, I'll delve into the insightful analysis of on-chain indicators for Bitcoin provided by Valdrin Tahiri on July 29, 2021, in the BeInCrypto article. In this piece, Tahiri explores the relationship between funding rates, open interest, and the short squeeze that occurred on July 26.
Funding Rate: Tahiri discusses the funding rate as a critical metric in the futures market, measuring the payment that traders must make to keep their positions open. Negative funding rates imply that short position holders pay long position holders, and vice versa for positive funding rates. The funding rate serves as a sentiment indicator, with negative rates suggesting a bearish sentiment. Extreme values in funding rates may indicate market euphoria, signaling potential market tops or bottoms.
In July, funding rates for Bitcoin were negative for a significant portion of the past 30 days, reaching a low of -0.0225% on July 25, the day before the short squeeze. The sudden shift to positive funding rates on July 26, followed by a return to negativity, played a crucial role in signaling and facilitating the short squeeze.
Open Interest: The article highlights the importance of open interest, representing the total value of outstanding futures contracts. Open interest reached a peak of $13.708 billion on July 25, likely driven by increased short interest. The surge in shorting contributed to negative funding rates, creating a conducive environment for a short squeeze. Subsequently, open interest started decreasing, reflecting changes in market dynamics.
Miner Accumulation and Market Sentiment: Tahiri incorporates insights from well-known investment officer @mskvsk, who pointed out that funding rates had turned positive. Additionally, miner accounts consistently accumulated in May despite negative market sentiment, indicating strong conviction among long-term holders. This observation adds another layer to the analysis, emphasizing the resilience of long-term players in the market.
Liquidations: The article provides data on liquidations, revealing that July 26 saw a substantial increase in short position liquidations, totaling $219 million. This surge in liquidations correlates with the short squeeze and signifies the impact of rapid market movements on traders holding short positions.
Future’s Estimated Leverage Ratio: The future’s estimated leverage ratio is discussed as a measure of the ratio between open interest on an exchange and the exchange's balance. The ratio spiked considerably on July 20 and 25 but subsequently reset. This metric serves as an additional gauge of market leverage and risk.
In conclusion, the article paints a comprehensive picture of the events leading to the July 26 short squeeze by analyzing funding rates, open interest, miner accumulation, liquidations, and leverage ratios. This multi-faceted approach provides a nuanced understanding of the market dynamics surrounding Bitcoin during that period.
