Bitcoin's recent rally was largely driven by short liquidations, not new investments, according to a new analysis from Glassnode and Bybit.
Summary
- Bitcoin's price jumped 24.6% in five days in August, driven by the liquidation of short positions rather than new long investments.
- Open interest in Bitcoin contracts fell by 12.6%, indicating that the rally was mainly due to forced closures of short trades.
- The options market saw a sudden shift after 361 days of puts being more expensive than calls, suggesting a temporary market reaction rather than a fundamental change.
Recent analysis from Glassnode and Bybit reveals that Bitcoin's notable rally in August, marking its most significant increase in two years, was primarily fueled by the forced liquidation of short positions instead of fresh investments.
During a five-day period, Bitcoin's value surged by 24.6%, while the open interest, a measure of active leverage, declined by 12.6%. This suggests that the price increase was largely due to short sellers being compelled to exit their positions.
Approximately 64,000 BTC worth of open interest was liquidated, with short positions making up 89% of the total amount liquidated during this rally.
The options market reflected this trend, as puts—contracts used to hedge against potential price falls—had been more expensive than calls for 361 days, until a sharp revaluation occurred in one trading session.
Bybit’s volatility index rose to four times its regular daily range during this period, indicating heightened market activity. The immediate revaluation at the front end of the futures curve contrasted with stable long-term contracts, reinforcing the notion that this rally was perceived as a temporary event rather than a significant trend shift.
Notably, this report is based on data as of August 23, focusing on crypto-centric trading platforms and omitting the CME, highlighting the unique dynamics within the crypto market.
Following the Federal Reserve's first rate hike of 2023, Bitcoin's price exceeded $80,000 this week, leading to another wave of liquidations. Over $230 million in Bitcoin shorts were liquidated, contributing to a total of $445 million liquidated across the market in just one session. Overall liquidations reached approximately $529 million within a 24-hour timeframe, predominantly from short positions.
The report's authors raised concerns about the sustainability of the recent price movements. A sustainable shift would be indicated by a consistent call-bid skew and a stable futures curve, while a return of put premiums alongside declining funding rates would suggest that the price spike was merely a temporary phenomenon rather than a new market trend.
