Bitcoin Short Squeeze Reveals Bearish Sentiment: A Classic Capitulation Signal

Bitcoin is facing challenges in reclaiming the $90,000 mark due to persistent selling pressure throughout the cryptocurrency market. The significant drop from its all-time high has raised concerns that this market cycle has reached its peak, leading numerous analysts to suggest that a bear market may be on the horizon. The sentiment has shifted dramatically, with fear among traders regarding the permanence of the bullish trend.

Key Takeaways

Bitcoin is struggling to regain the $90,000 level due to continued selling pressure.
Some analysts believe the market correction could lead to a recovery, while others predict a bear market.
Recent funding rates turning negative signal a behavioral shift towards short positions among traders.
Bitcoin is currently testing critical supply levels after recent price drops, with previous support levels now acting as resistance.

Nonetheless, some market participants maintain a more positive outlook, anticipating a recovery. They suggest that the current correction is part of a larger continuation pattern rather than a definitive end. These optimistic analysts believe a price rebound could happen once enough selling exhaustion occurs.

Top analyst Darkfost observes a critical shift in trader behavior reflected in the recent price movements. He notes that those who tried to take long positions during the correction have now been squeezed out.

Funding rates, which had remained high during the downturn, have since cooled and even dipped into negative territory—a strong indication that sentiment has shifted. Darkfost points out that traders waited for Bitcoin to fall more than 30% before moving into short positions, illustrating a delayed reaction which often coincides with key market turning points.

Understanding the Shift: Negative Funding Rates and Short Dominance

Darkfost clarifies that the recent change in funding rates carries weight beyond initial appearances. Traders often consider a neutral funding level to be 0%, but this is misleading. Most exchanges, including Binance, include an interest component of about 0.01% in their funding calculations.

Bitcoin Funding Rates - All Exchanges | Source: Darkfost Bitcoin Funding Rates – All Exchanges | Source: Darkfost

This means that when funding dips below 0.01%, it indicates dominance on the short side. A negative funding rate signals a stronger inclination towards aggressive shorting. According to Darkfost, this shift showcases a profound behavioral change among derivatives traders, suggesting a transition from forced exits of long positions toward strategic short exposure.

Historically, such shifts generally occur only after a correction has progressed significantly. Darkfost notes that these funding transitions often highlight trader capitulation—where traders who resisted the downtrend eventually conform to prevailing momentum, albeit after most of the downward movement has already taken place.

This trend has been observed in prior market cycles and tends to align with late-stage market bottoms. Darkfost mentions that Bitcoin might be entering a phase of disbelief, where prices start to rise even as shorts continue to increase. If this trend persists, it could serve as a catalyst for a price reversal, particularly if demand strengthens and shorts face liquidation pressure.

Bitcoin Price: Testing Supply Levels

Bitcoin is in the process of stabilizing following a sharp decline, currently trading around $87,000 after rebounding from a recent low near $80,000. The prevailing downtrend is evident as BTC remains below the 50-day, 100-day, and 200-day moving averages, indicating continued bearish momentum.

BTC testing fresh supply level | Source: BTCUSDT chart on TradingView

The downward slope of these moving averages reinforces the current trend. Despite the recent bounce, the recovery lacks strong volume support, suggesting buyers haven't yet returned with confidence.

The chart indicates that earlier support levels around $95,000 and $100,000 have transformed into resistance, becoming crucial levels to monitor during any recovery attempts. Failure to reclaim these areas may lead to renewed selling pressure and a revisit of recent lows. However, the upward wick below $80,000 shows aggressive buying at this low point, hinting that a short-term bottom could be forming if buyers continue to defend higher lows in the upcoming days.

While market sentiment remains delicate, the stabilization above $85,000 suggests we might see a consolidation phase rather than an immediate continuation of declines. A sustained move above the 100-day moving average would serve as the first solid confirmation of regained bullish momentum.