Bitcoin May Squeeze Higher as Retail Interest Subsides: Analysts

On-chain metrics like the “paper hands” ratio from Glassnode suggest a bottom could be nearing, one analyst said.

AccessTimeIconJan 5, 2022 at 11:18 a.m. UTC
Updated May 11, 2023 at 5:26 p.m. UTC
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Bitcoin, the crypto market leader, could be in for a recovery rally, as retail interest declines, analysts told CoinDesk.

“Whilst bitcoin remains flat in the short term, on-chain metrics like the paper hands ratio from Glassnode suggest a bottom could be nearing,” Marcus Sotiriou, an analyst at the U.K.-based digital asset broker GlobalBlock, told CoinDesk in an email.

The BTC paper hands ratio is the ratio of young coins active in the last six months to the cryptocurrency’s circulating supply. A high reading represents greed among retail or short-term traders, while a low number signals retail disinterest.

Retail investors are often referred to as having paper hands – weak capacity or desire to hold an asset for a long time – and are usually the last to enter the bull run and exit the bear run. Hence, declining retail activity is considered a contrary indicator – a hint of an impending reversal higher.

“If this ratio gives a high reading, it suggests retail greed, but if it is low, it suggests the market is at retail capitulation,” Sotiriou said. “We are at 24.5% currently, the lowest level since the 2015 bear market. Every time the ratio has reached around 25% previously, it has sparked a multiyear bull market with incredible gains, which indicates that this fearful period could be a great buying opportunity based on historical data.”

Further, the prevalent cautious mood in the derivatives market may portend a move higher. “The neutral to slightly below neutral funding rates seen recently suggest that a short squeeze is a plausible scenario,” according to Arcane Research’s weekly note published on Tuesday.

Funding rates refer to the cost of holding long or short positions in the futures perpetuals market. The mechanism helps keep the price of perpetuals or futures with no expiry tethered to the spot price. Positive funding rates mean longs are paying shorts, while negative rates mean the opposite.

Since early December, the number of open positions on Binance, the world’s largest cryptocurrency exchange by trading volume and open interest, has increased from 190,000 BTC to 258,000 BTC. Meanwhile, funding rates have been consistently neutral to negative, meaning investors have been predominantly holding shorts despite bitcoin’s downside momentum running out of steam and the cryptocurrency consolidating in the range of $45,400-$52,100.

Chart showing a pickup in BTC-denominated open interest and neutral-to-negative funding rates (Arcane Research, Glassnode)
Chart showing a pickup in BTC-denominated open interest and neutral-to-negative funding rates (Arcane Research, Glassnode)

A cautious or bearish mood after notable sell-off and consolidation often leads to short squeeze and corrective rallies. Costs associated with holding shorts become an issue for the bears once the market stops falling, thus forcing them to unwind their bearish bets. However, a squeeze higher may remain elusive if the macro picture turns bleak, as discussed here.

Bitcoin was last seen trading near $46,750, representing a 2% gain on the day.


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Omkar Godbole

Omkar Godbole is a Co-Managing Editor on CoinDesk's Markets team.

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