Short Bitcoin surges to the highest level as negative fees warn of the risk of a squeeze in Japan

Short selling positions on centralized exchange platforms are signaling a major warning in the crypto market, according to recent analysis by Santiment. Market wisdom is highlighting the most aggressive shorts, with a continuous negative fee system indicating traders expect Bitcoin’s price to decline. Currently, Bitcoin is trading at $67,900, down 1.04% over the past 24 hours.

Negative Fees: When Short Sellers Get squeezed

The negative fee system works simply but dangerously. When the fee rate turns negative, those who have opened short positions must pay the ones betting on a price increase. The deeper the negative, the greater the suffering for short sellers.

Data from Santiment shows that in Q3 2024, as Bitcoin dropped from $106,000 to $55,000 within a few weeks, the futures market experienced the lowest fee levels. However, just 20 days later, Bitcoin’s price began to surge, rising by up to 83% within four months. This phenomenon occurred because many open short positions were squeezed, forcing them to close, triggering a chain reaction of forced buybacks.

Lessons from October 10: The risk of another explosion

The historic event on October 10 last year highlights the hidden dangers in derivatives markets. The severe squeeze that day led to $19 billion in liquidations across both centralized exchanges and DEXs. Bitcoin’s price dropped by double digits within hours.

Even more dangerous is what happened afterward. Instead of encouraging traders to buy Bitcoin, they ramped up short positions, betting on further declines. The fee system flipped back to negative, indicating a bearish market sentiment.

Santiment analyzes that “extreme negative fees can pave the way for a rapid price recovery. Some shorts are highly leveraged, meaning traders borrowed funds to amplify potential gains. If the price moves up instead of down, these positions can be lost quickly. When liquidation thresholds are reached, exchanges automatically close positions to protect their systems.”

MVRV signals suggest Bitcoin may be near a bottom

Deeper analysis using the Market Value to Realized Value (MVRV) ratio shows a level of about 1.1. This suggests that the current price of $67,900 is fairly fair relative to the cost basis paid by traders.

History indicates that when MVRV drops below 1.0, Bitcoin is often considered undervalued relative to its true worth. However, the current situation differs from previous cycles. In this cycle, Bitcoin has not entered the typical overbought zone seen before the all-time high of $126,080 earlier this month. The figures are lower than expected.

This means that the bottom formation in this cycle could differ from past patterns—potentially less severe or occurring more quickly.

Forecast: The chance of a sharp move

The key point now is that the open short positions are very high, especially with high leverage used. Market sentiment indicators (50% of the market is bearish) show traders are strongly leaning toward the downside.

While heavy short selling does not guarantee an immediate rebound, it increases the likelihood of high volatility. If the price begins to rise even slightly, the risk of mass liquidations is significant. Santiment warns, “Given the lack of confidence in the market, and considering other indicators, we do not expect these shorts to close confidently. Therefore, a price move upward could trigger liquidations, leading to a sharp rally.”

The current situation suggests traders should closely monitor short positions and key price levels. If sentiment shifts, the potential for a rapid move in Bitcoin’s price in the short term is substantial.