In brief
- Bitcoin's rally over the past two weeks coincided with a decline in open interest, indicating it was driven by short-covering rather than new bullish demand.
- The market remains primed for volatility, with over $1.8 billion in leveraged shorts at risk of liquidation if Bitcoin reclaims $91,300.
- An analyst expects choppy year-end price action before a potential substantial move higher once post-October selling pressures subside, as BTC trades under $90,000.
Bitcoin’s recovery over the past three weeks or so 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 leverage washout.
In the weeks that followed, Bitcoin shed 27% through November 21, a period where rising open interest and falling cumulative volume delta showed the move was driven by investors opening short positions, according to data from Velo.
The dynamic shifted during the recent rally, in which Bitcoin soared nearly 15% from November 21 to December 9, setting a local top at roughly $94,200 on December 9, according to CoinGecko data.
That surge coincided with a decline in open interest and a stabilization in cumulative volume delta, signaling short covering, not new bullish demand, as the primary driver.
That unwind of bearish bets is further evidenced by the 25-delta options skew improving from -11% to -5% over the same period, according to Deribit data.
A drop in skew represents that investors are opening bearish bets, paying a premium for downside protection. On the contrary, a bounce in Skew shows improving investor sentiment and could signal potential bottom formation.
The outlook remains bullish on prediction market Myriad, owned by Decrypt’s parent company Dastan, with users assigning a 69% chance to Bitcoin's next move taking it to $100,000 rather than $69,000.
What’s next for Bitcoin?
The key question now is whether new buyers will emerge.
Open interest rose by nearly 4% since December 11 to 232,000 BTC, showing an uptick in speculation. If the cumulative volume delta also embarks on an uptrend, it would signal demand and potentially aid in Bitcoin’s recovery.
However, the buying pressure has yet to show up, as Bitcoin has shed nearly 5% since the December 9 peak of $94,200 and is currently trading at around $89,860.
Over the past week, excessive leverage has built up, with $1.80 billion in shorts at risk of liquidation if Bitcoin clears $91,300, according to CoinGlass liquidation map data.
If these sellers get liquidated, it could trigger a short squeeze as highlighted in a previous Decrypt 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 remained absent since October 10.
There is concern about a continued risk from the October 10 leverage washout, namely that “additional bodies will float to the surface,” Bitwise CIO Matthew Hougan told Decrypt last week.
On the other hand, “people have been selling, trying to get out in anticipation of the four-year cycle.”
Once those two forces are removed, the analyst expects crypto markets could move “substantially higher.”
Until then, however, Hougan believes that price action could be choppy heading into the year-end.
