Bitcoin Bounce Puts Altcoin Bears at Risk

As bitcoin (BTC) moves higher, the recently shorted alternative cryptocurrencies like solana's SOL may see leverage liquidations and exaggerated price rallies.

Since Monday's brief move below crucial support at $25,000, bitcoin has risen over 6% to trade near $26,600 at press time, CoinDesk data show.

Upbeat China August retail sales and factory output data released early Friday revived risk sentiment in financial markets, clearing the way for continued price gains in the leading cryptocurrencies.

Alternative cryptocurrencies like XRP, Ether (ETH), SOL, Tron's TRX, Dogecoin (DOGE) and are tracking bitcoin higher, as they usually do. The altcoin bounce comes days after traders sold these tokens, pricing in the possibility of defunct exchange FTX securing approval from the bankruptcy court to sell assets from its multi-billion dollar cryptocurrency holdings. SOL fell over 8% on Monday, leading the decline in altcoins after a court filing showed FTX's solana holdings at $1.6 billion.

The recovery puts altcoin bears, who took leveraged bearish bets on SOL and other tokens on fears of potential FTX creditor selling, at risk of liquidation. Exchanges liquidate positions when the market moves against a trader's bets, leading to margin shortage and the trader fails to provide additional margin.

Potential forced liquidation of shorts will likely bring additional bullish pressures for SOL's price, leading to a short squeeze-led rally.

"The biggest near-term risk (pain trade) is a positive one: short-covering of altcoins leading to leveraged liquidations driving up the entire complex. SOL is a good one to watch, for example," Ilan Solot, co-head of digital assets at Marex Solutions, said in an email.

Since Monday, funding rates in perpetual futures have been consistently negative. Funding rates represent cost of holding long and short positions in perpetual futures. A positive rate implies leverage is skewed on the bullish side while a negative rate indicates otherwise.

Open interest or the dollar value locked in active perpetual futures tied to SOL has increased by over 16% to a one-month high of $338 million, according to Coinglass.

The combination of rising open interest and negative funding rates suggests traders have recently raised bearish bets in SOL.