After springing back to life on the back of positive CLARITY Act development, the price of Bitcoin has been relatively quiet over the past few days. The premier cryptocurrency, which had been dancing around $82,000, is now barely above $78,000. According to a crypto trader on the social media platform X, the latest decline in Bitcoin’s price might not be what it seems and could be a fakeout.
Divergence Between BTC Price, Open Interest Suggests Imminent Reversal
Pseudonymous crypto pundit Cryptic Trades took to the X platform to share an interesting take on Bitcoin’s recent price decline. The market analyst posited that a combination of on-chain signals points to the formation of a trap for BTC short-position traders.
Firstly, Cryptic Trades highlighted a divergence between Bitcoin’s price and the Open Interest metric, which measures the total number of outstanding derivative contracts for a cryptocurrency. While BTC’s price fell towards $78,000, the Open Interest metric has been on an upward trend.
Typically, when price and Open Interest move in opposite directions, it means that a trend reversal (a return of bullish momentum, in this case) might be imminent.
The trader also noted that the Funding Rates have been negative, which correlates with the ongoing divergence between Bitcoin’s price and Open Interest. The Funding Rates, which measure the periodic fee paid by short traders to long traders, or vice versa, are usually negative when bears are in control of the market (and are the ones making the payment).
Cryptic Trades noted that negative Funding Rates suggest the bears are “doubling down” on their positions and continuously betting against the flagship cryptocurrency. “It also shows that even though the market structure remains intact, bears are shorting as if a breakdown already happened,” the crypto trader explained.
According to Cryptic Trades, the confluence of these signals is how bear traps are formed, and that could be the current situation for Bitcoin. A bear trap is a deceptive price pattern that typically involves a drop in an asset’s value (often beneath a support level), tricking market participants into believing that a new downtrend has begun.
It’s also important to note that extremely negative Funding Rates have often preceded a phenomenon known as a “short squeeze,” in which an asset’s price is driven higher by the forced closure of short positions. Hence, investors might want to exercise caution when entering any position at this juncture.
Bitcoin Price At A Glance
As of this writing, the price of BTC is around $78,130, reflecting an over 1% decline in the past 24 hours.
Featured image from Shutterstock, chart from TradingView
