In short
- Bitcoin’s rally over the past two weeks has coincided with a drop in open interest, suggesting it was driven by short-covering rather than new bullish demand.
- The market remains primed for volatility, with more than $1.8 billion in leveraged short positions at risk of liquidation if Bitcoin recovers $91,300.
- One analyst expects choppy price action at the end of the year, before a potential substantial increase once selling pressure subsides after October as BTC trades below $90,000.
Bitcoin’s recovery over the past three weeks may seem optimistic, but a closer look at derivatives data shows a lack of demand.
Investor appetite has struggled to recover since the October 10 debt crisis.
In the weeks that followed, Bitcoin fell 27% through Nov. 21, a period when rising open interest and falling cumulative volume delta showed the move was driven by investors opening short positions, according to Velo data.
The dynamics changed during the recent rally, with Bitcoin rising nearly 15% from November 21 to December 9, reaching a local high of around $94,200 on December 9, according to CoinGecko data.
This increase coincided with a decline in open interest and a stabilization of the cumulative volume delta, suggesting that short covering, rather than new bullish demand, is the main driver.
The unwinding of bearish bets is further evidenced by the fact that the 25-delta options skew improved from -11% to -5% over the same period, according to Deribit data.
A decline in skew means investors are making bearish bets and paying a premium for downside protection. On the contrary, a bounce in Skew signals improving investor sentiment and could point to a possible bottom formation.
The outlook remains bullish on the Myriad-owned prediction market Declutter parent company Dastan, with users assigning a 69% chance of Bitcoin’s next move taking it to $100,000 instead of $69,000.
What’s next for Bitcoin?
The key question now is whether new buyers will come.
Open interest rose almost 4% to 232,000 BTC since December 11, showing an increase in speculation. If the cumulative volume delta also starts an uptrend, it would be a signal of demand and potentially help Bitcoin’s recovery.
Buying pressure has yet to materialize, however, as Bitcoin is down nearly 5% since its December 9 peak of $94,200 and is currently trading around $89,860.
According to CoinGlass Liquidation Map data, excessive debt has built up over the past week, with $1.80 billion worth of shorts at risk of liquidation if Bitcoin clears $91,300.
If these sellers are liquidated, it could lead to a short squeeze, as highlighted above Declutter report.
When short sellers cover, they buy, triggering a reflexive rally. That could accelerate Bitcoin’s rally if it is supported by increasing demand from spot buyers, which has been absent since October 10.
There are concerns about a lingering risk from the October 10 debt crisis that “additional bodies will float to the surface,” Bitwise CIO Matthew Hougan told us. Declutter last week.
On the other hand, “people have been selling, trying to get out, anticipating the four-year cycle.”
Once these two forces are removed, the analyst expects the crypto markets could move “substantially higher.”
Until then, however, Hougan believes year-end price action could be choppy.
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