According to the latest on-chain data, investors have placed excessive bets on the Bitcoin price in recent weeks, leading to widespread problems.
Longs vs. shorts imbalance – how it caused price crash
In a Nov. 22 post on social media platform X, Alphractal CEO and founder Joao Wedson said revealed the underlying dynamics behind Bitcoin’s recent uncontrolled fall. In deciphering this downtrend, the crypto expert evaluated the Estimated Long/Short Positions metric, which estimates how much of the Open Interest on exchanges is devoted to long positions relative to short positions.
Wedson reported that approximately 71,000 BTC are positioned in longs across 19 exchanges, while a relatively smaller portion of BTC (27,900) is reserved in shorts. While this observation does not include data from the Chicago Mercantile Exchange (CME), the discrepancy between longs and shorts remains unusually large.
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This imbalance is significant because when there are clusters of long positions with similar price levels, the market tends to trend toward a more vulnerable state. Moderate pullbacks among these clusters often lead to a cascade of forced liquidations (known as a long squeeze) – an event that could in turn push prices further south.
In particular, Wedson pointed out that traders must be convinced that $100,000 was Bitcoin’s floor price – a speculation that was quickly invalidated after its failure. Then $90,000 came into the picture, followed by another series of liquidations. Right now, $84,000 appears to be the price majority that Bitcoin’s speculative traders are aiming for as a new price floor.
These liquidation events that occurred after the $100,000 and $90,000 support amounts were breached provided more liquidity to the buy side, allowing the Bitcoin price to tumble. At the same time, the main short positions have closed, making it difficult for a more defined price recovery to take place as there is hardly any sell-side liquidity that could send the Bitcoin price upward.
For Bitcoin to recover, Wedson explained that there must be a significant decline in long positioning while short exposure increases.
Beware of $81,250 – Analyst
In another post on X, technical analyst Ali Martinez says noted that Bitcoin’s two-year moving average, which is around $81,250, is an important milestone for the future trajectory of the flagship cryptocurrency.
The analyst explained that historical failures of the 730-day SMA have often marked the beginning of bear markets. Thus, in the scenario where the Bitcoin price falls past its current two-year average price, we could be witnessing the beginning of a long bearish cycle.
At the time of writing, Bitcoin has a valuation of $86,251, which reflects a price increase of more than 3% in the last 24 hours.
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Featured image from iStock, chart from TradingView