Bitcoin (BTC) is experiencing a volatile January. The coin rose earlier this week to a nearly four-week high before dropping just below $90,000 yesterday.
Amid these fluctuations, analysts are pointing to several key signals that may indicate a short squeeze is on the way.
Bitcoin derivatives data points to growing short squeeze risk
According to data from BeInCrypto Markets, the largest cryptocurrency showed green candles during the first five days of January. The price peaked on Monday above $95,000, a level we hadn't seen since early December, before the price declined again.
On January 8th, BTC briefly dipped below $90,000 and reached a low of $89,253 on Binance. As of the time of writing, the Bitcoin price stood at $91,078, a rise of 0.157% compared to the previous day.
Looking ahead, three key signals suggest that market conditions may be forming for a potential short squeeze in the Bitcoin price. For reference: a short squeeze occurs when the price rises against the expectations of bears.
With leverage, pressure intensifies, as traders are forced to close their positions and buy Bitcoin, causing an even stronger price surge. These purchases can quickly spread throughout the entire market.
1. Negative funding rate reflects bearish sentiment
The first signal comes from the Bitcoin funding rate on Binance. In a recent analysis, Burak Kesmeci pointed out that the funding rates on the daily chart have turned negative for the first time since November 23, 2025.
This value reflects the cost of holding perpetual futures positions. With a negative funding rate, short positions dominate, and short sellers pay funding fees to long position holders to maintain their positions.
Currently, the funding rate stands at -0.002, significantly lower than the -0.0002 recorded during the previous negative period in November. Back then, Bitcoin rose from $86,000 to $93,000 after this shift. The more negative rate in January indicates that bearish sentiment among derivatives traders is now even stronger.
"Funding is deeper negative while the price is under pressure. This combination increases the likelihood of a much stronger short squeeze. A sharp upward jump in Bitcoin would not be surprising here," Kesmeci wrote.
Secondly, another analyst notes that the Bitcoin price is falling while open interest continues to rise. This is seen as a clear signal of a potential short squeeze.
"This is a classic sign of an impending short squeeze!" the message stated.
Open interest reflects the number of outstanding derivative contracts. When it rises during a declining market, it typically means new short positions are being opened, not that long positions are being closed.
This can create an asymmetric risk, as an overcrowded short position makes the market vulnerable to rapid liquidations if the price reverses.
3. High leverage increases liquidation risks
Finally, the estimated Bitcoin leverage ratio according to CryptoQuant metrics is now at a 1-month high. This value measures how much borrowed money traders are using in their positions. High leverage increases both potential profits and losses, meaning even small price movements can lead to large-scale liquidations.
Traders with, for example, 10x leverage can lose their position if the Bitcoin price moves against them by just 10%. The current ratio indicates that many traders are taking on more risk and betting on a further decline. High leverage is extremely risky if the price suddenly rises.
Now that these three indicators align, Bitcoin is especially vulnerable to a sudden upward move, as a price recovery could trigger chain reactions and liquidations of over-leveraged short positions.
However, whether an actual short squeeze occurs depends on broader market catalysts, such as macroeconomic developments, spot market demand, and overall risk sentiment. Without a clear bullish signal, the bearish stance may persist, delaying or weakening a potential squeeze.