After a period of euphoria, the cryptocurrency market has entered a correction phase. Bitcoin (BTC) led the pullback, falling below its all-time high of $73,000. This shift triggered a significant change in the derivatives market, where “long positions” were dominant but are now being overtaken by “short positions”. Here are the details…
Short positions are increasing in the cryptocurrency market
The cryptocurrency market is in the process of transitioning from long positions, which indicate bullish bets, to short positions, which indicate bearish bets. This sudden reversal resulted in a “long squeeze” in which traders with long positions were forced to sell their holdings at a loss to avoid further financial strain. As a result, market dynamics have changed, potentially setting the stage for a “short squeeze.”
This is the scenario where short sellers are forced to buy back cryptocurrencies at inflated prices, pushing the prices up. Finbold’s Vinicius Barbosa identified two cryptocurrencies with high short selling potential: Ethereum (ETH) and Litecoin (LTC).
Will we see a potential recovery in Ethereum?
Ethereum, the world’s second-largest cryptocurrency by market cap, is currently trading at $3,709. Recent price action has been relatively flat, with almost half of daily volume concentrated in neutral positions, while open interest on longer time frames remains skewed towards short positions. This discrepancy shows that some traders may be cautious in the short term, but a significant number expect further price declines.
However, the last 24 hours represent only a small fraction of Ethereum’s overall open interest. More importantly, the weekly liquidation heatmap for ETH reveals a cluster of short liquidations concentrated around the $4,100 price zone. This data suggests that market makers could trigger a short squeeze by pushing the price into this liquidity pool, forcing short sellers to buy back ETH at a loss and potentially driving the price higher.
Litecoin’s eyes are on the up
Litecoin, another well-established cryptocurrency, is currently trading at $89.93, having experienced a modest gain of 2.72% in the last day, likely driven by the recent resurgence of interest in cryptocurrencies for “payments.” Similar to ETH, LTC’s open interest reflects the dominance of short positions. The weekly liquidation heat map for LTC reveals three distinct liquidity pools concentrated around the psychologically important $100 resistance level.
These areas represent potential targets for a short squeeze where short sellers would be forced to buy back LTC, potentially pushing the price above the $100 barrier. While the short squeeze rally could lead to price gains of around 10.5% for ETH and 11.2% for LTC, it is crucial to remember the inherent volatility and unpredictability of cryptocurrencies. Investors should be careful when opening positions and apply appropriate risk management strategies to reduce liquidation risk.
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