Bitcoin Short Squeeze Risk Rises as Derivatives Data Signals Growing Bearish Pressure

Bitcoin (BTC) has experienced significant price swings in early January 2026, with the price surging above $95,000 before retreating below $90,000. Analysts are now pointing to several derivatives-based signals that could suggest a potential short squeeze is building. A short squeeze occurs when prices move upward unexpectedly, forcing leveraged short positions to buy back the asset to avoid liquidation, which can push prices even higher.

Derivatives data suggests that bearish sentiment is intensifying among traders. Binance's Bitcoin funding rate turned negative on the daily chart, a shift that has not occurred since late November 2025. The current rate of -0.002 is significantly deeper than the -0.0002 recorded during the previous negative phase, indicating stronger bearish pressure.

At the same time, open interest has continued to rise despite Bitcoin's price decline. This suggests that new short positions are being added, rather than longs closing out their holdings. Analysts view this as a textbook sign of a potential short squeeze, where a sharp price rebound could trigger widespread liquidations.

Why Is a Short Squeeze Scenario Gaining Momentum?

Bitcoin's estimated leverage ratio has climbed to a one-month high, signaling that traders are increasingly using borrowed capital to maintain positions. High leverage means that even minor price movements can trigger broad liquidations. Traders using 10x leverage, for example, risk being liquidated if Bitcoin moves just 10% in the opposite direction.

The negative funding rate and rising leverage combine with a recent price drop to create a volatile mix. When funding rates are negative and prices fall, it suggests that short positions dominate the market. If Bitcoin rebounds, short sellers may be forced to cover their positions, potentially accelerating the upward move.

How Are Broader Market Trends Affecting Bitcoin?

Bitcoin spot ETFs have seen outflows recently, with some of the largest funds recording over $240 million in withdrawals. This outflow points to weakening demand and a lack of key catalysts to support a continued rally. Ethereum and XRP spot ETFs also posted outflows, signaling a broader shift in investor sentiment.

Technical indicators also suggest a weak market structure. The price action has failed to maintain a clear upward trend, with the RSI dropping to the midline. Additionally, Bitcoin ETF inflows have slowed, which could limit the potential for a sustained bullish breakout.

What Are Analysts Monitoring for Confirmation of a Short Squeeze?

Analysts are watching for three key conditions to confirm a potential short squeeze. The first is the continuation of the negative funding rate, which signals that bearish traders are still in control. The second is rising open interest, which suggests growing short exposure. The third is Bitcoin's leverage ratio, which indicates the risk of widespread liquidations.

Bitcoin's recent price action has seen a significant amount of long liquidations below $84,000, versus smaller short liquidations above $104,000. This imbalance means that a sharp rebound could quickly shift the balance of power in favor of buyers. If the price moves above $100,000, it could confirm a structural reversal and trigger further buying.

While the derivatives market signals rising short squeeze risks, the actual outcome will depend on broader market conditions. A decisive bullish trigger—such as a strong macroeconomic development or a surge in spot demand—could accelerate a reversal. Without such a catalyst, however, bearish positioning may persist, delaying or weakening the potential squeeze.