Has Bitcoin's Deleveraging Finally Concluded? Insights from Derivatives Data

The recent decline of Bitcoin to $81,119 on January 30 raised concerns regarding the state of deleveraging in the cryptocurrency market. Although forced liquidations surged to unprecedented levels, perpetual funding rates remained positive. This situation makes it tricky to determine whether the market has fully "cleansed" itself of leverage or if further liquidation events are on the horizon.

Key Takeaways

Bitcoin's price dropped sharply, leading to significant forced long liquidations.
On-chain data suggests that liquidation pressures have been predominantly one-sided toward the long positions.
The current positive funding rates imply that there may still be a demand for long positions, keeping the risk of further deleveraging intact.
Analyzing funding rates alongside liquidations is crucial for understanding market dynamics.

Bitcoin's Deleveraging Insights

Is the Deleveraging of Bitcoin Over?

On-chain analyst Axel Adler Jr. highlighted a recent "cascade of forced closures" within the last 24 hours, predominantly impacting long positions. His measures indicate that long liquidations took up approximately 97% of the total, while the 30-day moving average increased to 31.4%. This data showcases a pattern of sustained deleveraging pressures over the past month.

Bitcoin Futures Long Short Liquidations Dominance

Traders pay attention to extreme liquidation scenarios as they generally lead to stabilization in the market. However, Adler urged caution, stating that just because the readings are extreme doesn't mean selling is finished.

“Oscillator extremes often coincide with the culmination of forced selling and can lead to short-term stabilization. However, this is not a reversal signal without confirmations — for a sustainable ‘local bottom’ scenario, it’s essential to see at least normalization of the oscillator to zero or a decline in the 30-day average.”

To declare the deleveraging cycle as "over," we need to see a decrease in the liquidation imbalance rather than just a peak.

A point of concern in Adler's analysis is that even after significant price drops and liquidations, funding rates have remained positive—measured at 43.2% annualized that day. Although this is much lower than the levels seen during the peak periods of October and November, it still suggests a willingness to maintain long positions instead of a shift towards bearish sentiment.

Bitcoin Perpetual Funding Rates

Funding rates aren't just indicators of sentiment; they also reflect positioning pressures. If funding rates stay positive after a selloff, it could point to the rapid recovery of long positions or suggest that bullish leverage was not fully unwound. Adler believes the latter remains a concern.

“Positive funding amid massive liquidations increases the risk of repeated deleveraging: this means the market is recovering long positioning quickly enough or is not ready to fully unwind it. Complete ‘derivatives capitulation’ is often accompanied by funding transitioning to neutral or negative territory — this has not happened yet.”

In essence, the violent nature of the liquidation event indicates there is still a tendency towards long positions in the market. This situation is critical because a renewed decline could quickly trigger liquidations of those long positions again.

Adler summarized the insights from his analysis by stating that while the intensity of the liquidations might be noticeable, it does not necessarily signify a final resolution.

“Together, the two charts paint a picture of likely incomplete deleveraging: liquidations hit longs extremely hard, but overall positioning remains tilted bullish. The liquidation cascade (long dominance ~97%) is a symptom of market overload with long positions, but not necessarily final cleansing. Persistently positive funding (43% annualized) may indicate that demand for long exposure is not broken, and the deleveraging process is not complete.”

Until there are clear confirmations of a reversal, Adler states the prevailing scenario is less about “final capitulation” and more about “incomplete deleveraging.” This indicates that the market may have flushed out some leverage but might not be finished if the appetite for long positions persists amidst future downturns.

As of now, Bitcoin is trading at $82,968.

Bitcoin Price Chart