The cryptocurrency market experienced a significant crash in early October, fueling bearish sentiment and attracting highly capitalized short sellers. Some cryptocurrencies are now at risk of short squeeze as there is an imbalance in market open interest that is dominated by short positions.
In particular, Sui (SUI) and Celestia (TIA) stand out for having extremely high negative funding rates, according to CoinGlass. On October 4, short sellers SUI and TIA paid long position holders 71.54% and 124.88% interest, respectively.
These funding rates were the most skewed among the 30 cryptocurrencies with the highest open interest in the market.
Essentially, funding rates can increase or decrease due to an imbalance between open short and long positions, which interferes with momentum. Markets with a large number of short positions will punish short sellers with higher costs of keeping their positions open, potentially causing a short squeeze.
Sui Short Squeeze Alert (SUI)
First, on October 2, Sui hit a record high open interest of $502.28 million, trading at $1.85. This was mainly due to the sharp increase in short positions, as evidenced by the sudden sharp negative decline in SUI funding rates.
The trend continued and on October 4th the token reached a record negative funding rate at $1.69. In its current state, Sui could soon suffer from a short squeeze if demand suddenly increases.
Notably, the last time SUI saw such an imbalance, weighted by total open interest, prices rose significantly in August.
Interestingly, the imbalance emerged a day after Sui unlocked over $100 million worth of tokens, as Finbold previously warned. The event raised concerns that Sui’s venture capitalists (VCs) were using retail interest as an “easy liquidity outlet.”
While increased short selling and high negative funding rates have the potential to cause short squeezes and price spikes, traders should remain cautious. This is because short positions tend to increase when assets are overbought or bearish sentiment dominates the market.
SUI, for example, recently surged over 100% in a short period of time, indicating that the cryptocurrency is overbought. On the other hand, the TIA is clearly dominated by short sellers amid bearish sentiment that has continued since July.
Thus, these projects cannot undergo a short squeeze unless further data suggests otherwise and sentiment changes. Traders can open and close positions at any time, repricing them depending on market dynamics.
