Bitcoin Short Squeeze Sends Futures Open Interest Into Freefall

Bitcoin has climbed from roughly $62,000 to $80,000 over the past week, marking its second-biggest weekly gain in five years. A move of this size would normally encourage traders to take on more risk through leveraged futures and other derivatives.

This rally, however, has unfolded differently. Rather than being driven primarily by new bullish positions, the advance appears to have been fueled significantly by traders closing bearish bets, or short covering.

Futures open interest (OI), which measures the number of outstanding futures contracts, provides evidence of this shift. Bitcoin-denominated OI has fallen to about 587,584 BTC, its lowest level in nearly five months, from 645,760 BTC on Aug. 14, according to Glassnode. Using BTC rather than dollar values offers a clearer view of positioning because it removes the impact of Bitcoin’s rising price on the size of open positions.

Put simply, Bitcoin’s spot price has climbed sharply while futures open interest has moved in the opposite direction. Short sellers either closed their positions by buying back Bitcoin or had their positions liquidated after failing to meet margin requirements.

Billions of dollars in short positions were wiped out during the rally, creating a powerful short squeeze that helped push Bitcoin above $80,000.

Funding rates in perpetual futures also point to limited leverage. Annualized rates have remained below 10%, suggesting that bullish positioning is still relatively restrained. If traders were aggressively opening long positions, funding rates would likely have risen much higher.

A Positive Signal

The limited participation in derivatives markets could ultimately benefit Bitcoin’s rally by reducing excessive leverage and making the advance more stable.

The signal becomes even more constructive when falling activity is accompanied by declining open interest in futures backed by Bitcoin or other cryptocurrencies. That is what the market is currently experiencing.

Glassnode data shows crypto-margined futures open interest has dropped to an all-time low of roughly 52,000 BTC, representing only about 11% of total futures activity.

This shift can reduce the risk of sharp, self-reinforcing sell-offs because cash collateral generally maintains its value even when Bitcoin falls. Crypto-backed collateral, on the other hand, loses value alongside the underlying asset, potentially triggering liquidations that drive prices down further.

The growing preference for cash-margined futures may therefore be one reason Bitcoin’s volatility has gradually declined in recent years.