Bitcoin Spot Demand Builds as Short Squeeze Risk Increases

Bitcoin’s rally in early 2026 appears to be driven by spot buying, indicating strong real demand rather than speculative positioning through leveraged futures.

• Spot markets involve the direct purchase of Bitcoin, while futures markets allow exposure without asset ownership, making spot-driven rallies more sustainable.

• Data from Checkonchain and Coinglass shows that Bitcoin’s move from $90,000 to $97,000 over the past week is supported by spot buying, with minimal changes in futures open interest.

Bitcoin’s recent price movements have led to negative perpetual futures funding rates, where short sellers pay longs, increasing the risk of a short squeeze if the rally continues.

• Short squeeze risks arise when rising prices force short sellers to close positions, potentially accelerating upward momentum.

• This dynamic could lead to cascading liquidations, particularly if Bitcoin continues to hold above $90,000.

• The Nasdaq 100’s flat performance year-to-date, compared with Bitcoin’s 10% gain, suggests a rotation into crypto as a higher beta tech proxy.

The Bitcoin derivatives market has seen significant deleveraging, with open interest dropping by 31% since October 2024.

• This reduction in leverage is seen as a positive sign of market maturation, historically preceding rebounds in price.

• Analysts note that such deleveraging creates healthier conditions for sustainable price appreciation, though the timing of any recovery remains uncertain.

• On-chain metrics also indicate reduced selling pressure, with exchange inflows dropping by over 95% in recent months.

What is the significance of spot buying in Bitcoin’s price rally?

• Spot buying, where investors directly purchase Bitcoin rather than using leveraged futures, reflects stronger underlying demand.

• This type of buying is generally seen as more sustainable than leveraged rallies, which can be prone to volatility and liquidation events.

• Checkonchain data highlights how the recent price increase was driven by spot buyers, rather than a surge in futures activity.

What are the implications of negative perpetual futures funding rates for Bitcoin’s price?

• Negative perpetual futures funding rates indicate that short sellers are paying longs, which can increase the risk of a short squeeze if the price continues to rise.

• This situation can create a self-reinforcing cycle, where rising prices force short sellers to close positions, further driving the price higher.

• This dynamic is especially relevant in markets with significant leverage, as liquidations can lead to sharp price movements.

How has Bitcoin’s derivatives market evolved, and what does it suggest about future price movements?

• Bitcoin’s derivatives market has seen a significant reduction in open interest, a sign of healthy deleveraging and market maturation.

• This pattern has historically preceded major market rebounds, suggesting a potential trend reversal could be on the horizon.

• On-chain data also supports this narrative, showing reduced selling pressure and increased accumulation among long-term holders.

Bitcoin’s current price action remains influenced by institutional demand and ETF flows, with spot demand increasing as investors seek exposure.

• Derivatives markets are also shifting from defensive to directional positioning, with options resets and dealer gamma flips potentially providing tailwinds for further price appreciation.

• However, the market remains fragile, with many investors still holding at an average unrealized loss, as indicated by the STH-MVRV ratio.