According to the latest on-chain data, investors have been betting excessively on the price of Bitcoin in recent weeks, leading to general difficulties.
Imbalance between long and short positions: how this induced the price drop
In a Nov. 22 post on social media platform In deciphering this downward trend, the crypto expert evaluated the estimated long/short positions metric, which estimates how much of the open interest on exchanges is dedicated to long positions relative to short positions.
Wedson reported that, across 19 exchanges, there are around 71,000 BTC positioned in long positions, while a relatively smaller amount of BTC (27,900) is dedicated to short positions. While this observation does not include data from the Chicago Mercantile Exchange (CME), the discrepancy between long and short positions remains unusually large.
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This imbalance is significant because when there are groups of long positions at similar price levels, the market tends to tilt towards a more fragile state. Moderate pullbacks below these groups often lead to a cascade of forced liquidations (known as a long squeeze), an event that could in turn push prices further down.
In particular, Wedson noted that traders must have been convinced that $100,000 was the bottom price for Bitcoin, a speculation that was soon nullified after its failure. They subsequently targeted $90,000, followed by another series of sell-offs. At the moment, $84,000 appears to be the price that most speculative Bitcoin traders are targeting as the new bottom price.
These liquidation events that took place after the $100,000 and $90,000 supports were broken provided more buy-side liquidity for the price of Bitcoin to fall. At the same time, the largest short positions have been closed, making it difficult for a more defined price recovery to occur, as there is hardly any liquidity on the sell side to drive up the price of Bitcoin.
For Bitcoin to recover, Wedson explained that there needs to be a significant decline in long positioning while short exposure is increasing.
Beware of $81,250 – Analyst
In another post on
The analyst explained that historical failures of the 730-day SMA have often ushered in bear markets. Therefore, in the scenario where the price of Bitcoin surpasses its current 2-year average price, we could be witnessing the beginning of a long bearish cycle.
At press time, Bitcoin has a valuation of $86,251, reflecting a price increase of over 3% in the last 24 hours.
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Featured image from iStock, chart from TradingView