After coming back to life thanks to the positive development of the CLARITY Act, Bitcoin’s price has been relatively quiet in recent days. The leading cryptocurrency, which hovered around $82,000, is now barely above $78,000. According to a crypto trader on social media platform
Difference between BTC price and open interest indicates an impending reversal
The pseudonymous crypto expert Cryptic Trades went to the X platform part an interesting take on Bitcoin’s recent price drop. The market analyst stated that a combination of signals on the chain points to the formation of a trap for short BTC traders.
First, Cryptic Trades highlighted a difference between Bitcoin’s price and the Open Interest metric, which measures the total number of outstanding derivative contracts for a cryptocurrency. While the price of BTC fell to $78,000, the Open Interest metric is on an upward trend.
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When price and open interest move in opposite directions, it typically means that a trend reversal (in this case, a return of bullish momentum) is imminent.
The trader also noted that funding rates have been negative, which correlates with the ongoing gap between Bitcoin’s price and open interest. Funding Rates, which measure the periodic compensation that short traders pay to long traders, or vice versa, are typically negative when bears are in control of the market (and are the ones making the payment).
Cryptic Trades noted that negative funding rates suggest the bears are “doubling down” on their positions and continually betting on the flagship cryptocurrency. “It also shows that even though the market structure remains intact, bears are shorting as if a breakdown has already occurred,” the crypto trader explained.
According to Cryptic Trades, the confluence of these signals is how bear traps are formed, and that could be the current situation for Bitcoin. A bear trap is a deceptive price pattern that typically involves a decline in the value of an asset (often below a support level), misleading market participants into believing that a new downtrend has begun.
It is also important to note that extremely negative funding rates have often preceded a phenomenon known as a ‘short squeeze’, where the price of an asset is driven up by the forced closing of short positions. Therefore, investors may want to be cautious about taking a position at this time.
Bitcoin price at a glance
At the time of writing, the price of BTC is around $78,130, reflecting a drop of more than 1% in the last 24 hours.
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Featured image from Shutterstock, chart from TradingView