Bitcoin (BTC) had a volatile January. The coin rose to nearly four-week highs earlier this week but quickly dropped below 90,000 USD yesterday.
During these fluctuations, analysts are highlighting several key signals that may indicate an upcoming short squeeze.
Bitcoin derivatives data shows increased risk of a short squeeze
BeInCrypto Markets data shows that the largest cryptocurrency continued with green lights for the first five days of January. The price rose above 95,000 USD on Monday, a level last seen at the beginning of December before it turned downward.
On January 8th, BTC briefly dropped below $90,000 and reached a low of $89,253 on Binance. As of now, Bitcoin is trading at $91,078, a 0.157% increase over the past day.
Three key signals now suggest the market may be heading toward a short squeeze in Bitcoin. A short squeeze occurs when the price rapidly rises against those betting on a decline.
High leverage increases pressure, as traders are forced to close their positions and buy Bitcoin, which can rapidly drive the price upward. This buying can quickly impact the entire market.
1. Negative funding rate indicates bearish market sentiment
The first sign comes from Binance's Bitcoin funding rate. In a new analysis, Burak Kesmeci showed that the funding rate turned negative on the daily chart for the first time since November 23, 2025.
This figure shows the cost of holding perpetual futures positions. When the funding rate is negative, short positions dominate, and short sellers pay funding fees to long position holders to maintain their positions.
The current funding rate is -0.002, much lower than the -0.0002 seen during the previous negative period in November. Last time, Bitcoin rose from $86,000 to $93,000. January has a stronger negative rate, indicating that derivatives traders are even more bearish now.
"Funding is even more negative and the price continues to be pressured. This combination increases the likelihood of a strong short squeeze. A significant rise in Bitcoin would not be surprising now," wrote Kesmeci.
Another analyst has also observed that the Bitcoin price is going downward, yet Open Interest is increasing. The analyst argues this is a sign of a possible short squeeze.
"This is a textbook example of an upcoming short squeeze!," it says in the post.
Open interest shows how many open derivative contracts exist. When it rises while the price falls, it typically means new positions are being taken in the same direction. This often indicates more traders are betting on a price drop, rather than long-term positions being closed.
This can create imbalance, as too many short positions can make the market sensitive to rapid liquidations if the price reverses upward.
3. High leverage increases the risk of liquidation
Finally, Bitcoin's Estimated Leverage Ratio has reached its highest level in a month, according to CryptoQuants data. This figure shows the amount of borrowed money in traders' positions. High leverage amplifies both profits and losses, so small price movements can lead to extensive liquidations.
Traders with, for example, 10x leverage could be liquidated if Bitcoin moves just 10% in the wrong direction. The current value indicates that many have increased their risk and are betting on continued decline. High leverage becomes especially risky if Bitcoin's price suddenly rises.
When these three indicators align, Bitcoin may become more vulnerable to a strong upward move if the price turns upward, triggering many traders with large short positions to be forced into selling.
But whether a short squeeze actually occurs depends on larger factors such as macroeconomics, spot market demand, and market risk appetite. Without a clear positive catalyst, bearish positions may remain, potentially delaying or weakening a short squeeze.