Crypto market trends have recently been flat, prompting investors to look for signals from various indicators. Despite this apparent stagnation, significant short-selling pressure in two altcoins has emerged, raising the possibility of a potential short squeeze in the coming week.
Understanding Short Squeeze Dynamics
When investors open a short position in the crypto market, they commit collateral and set a liquidation price above the position’s opening price. This predetermined threshold acts as a trigger for the forced closure of the position and the conversion of collateral into cash if the underlying asset’s index price reaches or exceeds this level.
Additionally, derivative exchanges offer a funding rate in response to the prevailing long/short ratio, a mechanism designed to maintain market balance. Essentially, an increase in short positions results in short position holders paying interest to long position holders at the funding rate, which incrementally consumes the collateral over the typical 8-hour interest payment cycle, thereby increasing the risk of liquidation.
In light of these dynamics, examining funding rates and liquidation heat maps provides valuable insights into the potential emergence of short squeezes in the crypto market. Accordingly, data from CoinGlass highlights two altcoins that could be subject to a short squeeze next week.
BNB and Bitcoin Cash Draw Attention
Leading these altcoins is BNB (BNB), which has faced significant short pressure following news of Binance‘s former CEO Changpeng Zhao (CZ) facing imprisonment in the USA. This development, perceived as a downward trend, has created a significant imbalance in the market, thus bringing a short squeeze scenario for the altcoin in a predominantly downward momentum environment.
Specifically, BNB currently has the fifth highest open interest among all cryptocurrencies and the highest negative funding rate at 56.44%. Historically, such distinctly negative funding rates have often been the trigger for short-term price rises characterized by brief rallies.
Moreover, Bitcoin Cash (BCH) also stands out as a potential short squeeze candidate throughout the week, supported by a notable negative funding rate. Currently, shorters in BCH are paying interest to longers at a rate of up to 12%, representing the second highest rate observed among various altcoins.
The liquidation heat map of BCH, indicating two different liquidity zones at ranges of $600 to $650 and above the $700 threshold, further strengthens the potential for a short squeeze.
However, it is important to remind investors to be cautious as rising negative funding rates and accumulating liquidation positions alone may not be sufficient and effective for a short squeeze, which also depends on the onset of positive market sentiment that could encourage the needed price rise.
