In a recovering cryptocurrency landscape, every pump and long position opened leaves pools of liquidity behind, which can lead to long squeezes. Therefore, traders can look for cryptocurrencies with increased long volume to prepare for retracements.
Finbold collected data from CoinGlass on March 2 to analyze the derivatives market. Cryptocurrencies have emerged amid a remarkable rally with a prevailing bullish sentiment. Bitcoin (BTC) and Ethereum (ETH) in particular recorded massive gains and are now threatening a correction.
Basically, traders tend to open long positions when the market is rising, while they prefer to enter short positions when the market is falling. However, long positions are trading contracts that require the posting of collateral and set a downward liquidation price.
When this liquidation price is reached, the contract is closed and the trader's position is liquidated, thereby selling the security. This could drive prices further lower and liquidate more trading contracts in a cascading effect known as a long squeeze.
Thus, market makers can use pools with high liquidity as targets to increase volatility and their profits.
Long squeeze alert for Bitcoin (BTC) at $50,000
Interestingly, Bitcoin has accumulated relevant long liquidations around the $50,000 area, which represents key psychological support and resistance.
The monthly chart shows eight liquidity pools with over $1 billion each, ranging from $50,700 to $49,700. At least half of them have long-term liquidations worth over $2 billion, totaling up to over $12 billion.
Still, there are smaller pools of liquidity to the upside, with a candle wick at $64,300. Professional traders could use this wick for further momentum to attract more liquidity to the $50,000 zone before moving on to a long squeeze.
BTC 1-month liquidation heatmap. Source: CoinGlass
Ethereum could soon fall back to $2,400
On the other hand, from a historical perspective, Ethereum has even larger downside liquidity pools in February. These pools suggest a possible long squeeze to $2,400, causing many traders to liquidate at previous levels.
Like Bitcoin, ETH could initially reach the local high of around $3,500 to accumulate further long-term liquidations before the larger move.
ETH 1-month liquidation heatmap. Source: CoinGlass
Diploma
In summary, Bitcoin and Ethereum could soon fall back to lower levels in a corrective move after the recent rally. A long squeeze could result in losses of 18% and 29% from current prices of $61,000 and $3,400, respectively.
Notably, these are historically common retracements in the highly volatile cryptocurrency market during bull runs.
Still, there could be a brief rise in the two cryptocurrencies to their local highs before a downtrend occurs, or the derivatives market could shift entirely in the following weeks – eliminating this reported long squeeze bonus.
Disclaimer: The content of this website should not be considered investment advice. Investing is speculative. When you invest, your capital is at risk.
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