Bitcoin's derivatives market is displaying conflicting signals that could expose the asset to forced liquidations under certain conditions, according to analyst Axel Adler Jr.
Open interest in BTC-denominated contracts has fallen nearly 4% since August 21, declining from 331,100 BTC to 318,600 BTC by August 31, with an additional 2,850 BTC exiting positions in the past 24 hours. This deleveraging follows an earlier short squeeze event.
However, funding rates tell a different story. The current funding rate stands at 0.00906%, while the eight-hour average sits at 0.00821% and the 24-hour average at 0.00725%. The shorter-term average runs 13% above the daily figure, indicating stronger demand for long positions among active traders.
The Squeeze Scenario
Adler warns that the most dangerous setup would emerge if traders begin rebuilding leverage while maintaining bullish positioning—a scenario where rising funding costs could coincide with recovering open interest. Under those conditions, a Bitcoin price decline could trigger cascading forced liquidations among leveraged long positions.
The analyst does not currently view the market as overheated, but emphasizes the importance of monitoring whether funding rates continue climbing as open interest begins recovering.
Technical Context and Recent Price Action
Bitcoin dipped below $77,000 during recent market volatility before recovering to $79,000. Technical analysts have identified $79,700 as a key resistance level needed for four-hour confirmation, with $77,000 to $78,000 serving as nearby support.
Over the past two weeks, more than $9.7 billion in crypto positions have been liquidated, comprising $6.55 billion in shorts and $3.16 billion in longs. Bitcoin's move back to $79,000 triggered approximately $30 million in short liquidations within one hour.
The distinction between forced buying driven by liquidations and genuine spot demand remains critical. If Bitcoin maintains levels above $79,700 with stronger volume, the market may absorb higher funding costs without becoming vulnerable to a squeeze. Conversely, a decline through $77,000 to $78,000 could make rising funding rates significantly more problematic for long traders.
