Bitcoin Short Positions Build Ahead of Potential Fed Rate Cut

By Akash Girimath

With the Federal Reserve’s interest rate decision less than a week away, speculation is rife among Bitcoin investors, with more than $6 billion in positions at risk of liquidation.

Nearly $3 billion in short positions will be liquidated if Bitcoin moves just 3% to $96,250, according to CoinGlass data. On the other hand, $3.52 billion in long positions will be blown out of the water if Bitcoin drops 4.54% to $89,209.

“Cryptocurrencies face strong resistance to upward movement, with market participants still maintaining a bearish mindset, leaving the market highly vulnerable,” Adam Chu, chief researcher at options analytics firm GreeksLive, told Decrypt yesterday.

Bitcoin is currently trading at $93,800, up 1% over 24 hours and nearly 4% over the past week, following a rocky start to the month, CoinGecko data shows.

With bond traders pricing in a quarter-point rate cut at nearly 90%, a potential price uptick could trigger a short squeeze, pushing Bitcoin close to the key psychological level of $100,000.

A short squeeze occurs when the price moves against investors’ bearish bets, forcing them to cover their positions by buying, accelerating the underlying asset’s uptrend.

The current market conditions set up a high-stakes tug-of-war ahead of the Fed's decision, where the market's underlying fragility could amplify the impact of the central bank’s policy signal.

However, a closer look at derivatives data shows a more nuanced picture.

Open interest for Bitcoin derivatives contracts has been steadily declining since November 21, even as the cumulative volume delta for perpetual contracts has climbed—a pattern suggesting traders are short-covering, according to Velo data. 

In other words, the data suggests Bitcoin isn’t rising because traders aren't becoming bullish. Instead, prices may be getting pushed up as short sellers close their positions, while spot buying remains weak.

Still, the funding rate and Coinbase premium indicators, which help determine investor positioning and spot buying demand, remain indecisive, showing no particular directional bias.

For the uptrend to rejuvenate, it likely needs a sustained uptick in spot cumulative volume delta and open interest.

Spot and perpetual orderbook depths of up to 10% have meanwhile flipped negative since December 2, as traders remain unwilling to drive prices higher.

"At this stage, a short squeeze looks more likely than a long squeeze," Ryan Lee, chief analyst at Bitget, told Decrypt. "Institutional inflows remain steady, regulatory signals are leaning constructive, and sentiment is gradually shifting risk-on."

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