Bitcoin (BTC) is experiencing volatility in January, with the coin surging to a near four-week high early this week before briefly falling below USD 90,000 yesterday
Amid these fluctuations, analysts are highlighting several key signals that may indicate the potential for a short squeeze in the future
Bitcoin derivatives data indicates rising short squeeze risk
According to BeInCrypto Markets, the largest cryptocurrency has maintained five consecutive green candles at the start of January, with prices rising above USD 95,000 on Monday—the highest level since early December—before reversing direction
On January 8th, BTC briefly dropped below USD 90,000 and touched a low of USD 89,253 on Binance. As of this writing, Bitcoin is trading at USD 91,078, up 0.157% for the day
Looking ahead, there are three key signals indicating that market conditions may be favorable for a short squeeze in Bitcoin's price. A short squeeze occurs when prices rise against the prevailing bearish trend
High leverage amplifies pressure, as traders holding short positions are forced to be liquidated and must buy back Bitcoin, further driving prices up. This buying pressure quickly spreads across the market
1. Negative Funding Rate Reflects a Bearish Outlook
The first sign comes from Bitcoin's funding rate on Binance, which Burak Kesmeci recently analyzed as having turned negative on the daily chart for the first time since November 23, 2025
This figure tracks the cost of maintaining perpetual futures positions. When the funding rate is negative, it means there are more short positions than long positions, and short sellers must pay funding to long holders to maintain their positions
Currently, the funding rate is at -0.002, significantly lower than the previous negative peak of -0.0002 seen in November. That previous shift occurred before Bitcoin rose from USD 86,000 to USD 93,000, and the more severe negative funding rate in January reflects strong bearish sentiment among derivatives traders
Currently, the funding rate is becoming more negative, while prices remain under pressure. This combination increases the likelihood of a more severe short squeeze. Therefore, a strong rebound in Bitcoin is not surprising at this point, Kesmeci wrote
Secondly, another analyst observed that Bitcoin's price continues to show a downward trend, while Open Interest is increasing. The analyst interprets this as a signal of a potential short squeeze
This is a textbook example of an impending short squeeze! It is mentioned in the post
Open interest reflects the number of outstanding derivative contracts. When this value increases while prices decline, it usually indicates new positions are being opened in the same direction—often meaning increased short positioning rather than closing long positions
This situation could create imbalance risks, as an excessive number of short positions may make the market vulnerable to rapid liquidation if prices reverse upward
3. High leverage increases the risk of liquidation
Finally, Bitcoin's Estimated Leverage Ratio has reached its highest level in one month, according to data from CryptoQuant. This metric tracks the amount of borrowed capital traders use in their positions. High leverage amplifies both profits and losses, so even minor price movements can trigger widespread liquidations
For example, a trader using 10x leverage could be liquidated if Bitcoin moves against them by just 10%. Current leverage levels indicate that many market participants are accepting higher risk by betting on a continued downtrend. High leverage is therefore risky if Bitcoin suddenly reverses upward
When all three of these indicators converge, Bitcoin may become vulnerable to a sharp upward move—if a price rebound triggers continuous liquidation of over-leveraged short positions
However, whether a short squeeze will occur depends on broader market factors, such as macroeconomic developments, spot market demand, and overall risk sentiment. But without clear positive catalysts, bearish positioning is likely to continue, potentially delaying or reducing the severity of any potential squeeze