The Bitcoin futures market is seeing a rise in leverage, which may signal an impending short squeeze that could lead to a bullish rally, according to a recent by a CryptoQuant analyst, known as Percival.

Percival insights shared earlier today on the QuickTake platform detailed the current state of Bitcoin leverage and the potential impact it could have on Bitcoin’s price trajectory.

Bitcoin Open Interest And Leverage Surge Amid Volatility

According to Percival, the futures market consists of two major groups: institutional traders on the Chicago Mercantile Exchange (CME) and retail or native cryptocurrency traders.

Institutional traders typically hedge their positions and are less prone to liquidations, while retail traders often face higher liquidation risks, particularly during periods of increased market volatility. These dynamics are particularly relevant now, as leverage in the futures market has surged over the past two weeks.

Percival noted that open Interest in Bitcoin futures has now grown by $6 billion, reaching a total of $28.3 billion, just shy of the all-time high of $31 billion recorded in July.

This increase in leverage is tied to recent market movements, especially around the volatility caused by the recent US Federal Reserve’s interest rate decisions. Despite this uptick, institutional traders are seen to hold onto their positions confidently, anticipating further volatility but are less exposed to liquidation risks than retail traders. In addition, funding rates for Bitcoin Future contracts indicate that investors holding long positions currently receive around $2 million daily. This suggests that demand for long positions remains strong, as investors are willing to pay to maintain these positions.

However, Percival cautions that while this is not an “overly excessive amount”, sudden price corrections could quickly wipe out those over-leveraged traders attempting to capitalize on these market movements.

Short Liquidations Hint At Possible Short Squeeze

A notable observation in the report was the significant increase in short liquidations. Percival explained that short liquidations have risen by approximately $493 million, which could be a precursor to a “short squeeze.”

A short squeeze occurs when short positions are forced to close due to rising prices, which can cause further upward pressure on the asset’s price—in this case, Bitcoin’s. Percival speculated that this surge in short liquidations could rapidly recover Bitcoin’s price following any “sharp corrections.”

The liquidation of short positions would give the market the momentum needed for Bitcoin to bounce back and potentially trigger a more significant rally. While volatility is expected in the short term, the overall outlook appears to lean towards a bullish trend if this short squeeze scenario continues.

Featured image created with DALL-E, Chart from TradingView