Analyst: The current market's significant deleveraging has reduced the likelihood of a sharp decline, but at the same time, it limits the potential for upward short squeezes.

BlockBeats News, March 5 — Independent crypto analyst Axel posted that the perpetual contract funding rate chart for Bitcoin shows that throughout February and early March 2026, the funding rate remained in negative territory, indicating that short positions dominated the perpetual futures market.

Since late January, the funding rate has frequently fallen into negative territory, and over the past two weeks, it has stayed there with little recovery. The most extreme readings occurred on February 25 and 28 — when prices tested local lows around $64,000 to $65,000. As of March 4, the rate was still slightly negative, but the two-week accumulation of negative funding rates suggests that short positions remain prevalent.

A negative funding rate means short holders pay long holders to maintain their contracts, indicating a bias toward shorts. Historically, this situation either signals that any upward momentum could trigger a short squeeze or, if the decline persists, confirms a bearish trend. A key trigger for a sentiment reversal would be a sustained return of the funding rate to positive levels, combined with prices consolidating above a key resistance level (around $70,000) and open interest stabilizing or increasing.

Additionally, the open interest in USD-denominated Bitcoin futures shows a decline from a peak of $47.6 billion in October 2025 to $20.8 billion in March 2026. While part of this decline can be explained by falling BTC prices, the overall trend indicates reduced derivatives leverage during the adjustment period.

The open interest in USD futures has fallen by more than half from the October 2025 peak ($47.6 billion) and about one-third from the January high ($32 billion). As of March 4, open interest stood at $20.8 billion — levels not seen since before the 2025 rally. Over the past week, open interest decreased by another 3.2%, indicating continued deleveraging, albeit at a slower pace.

A decline in open interest alongside falling prices signals forced or voluntary liquidations, meaning the market is indeed shedding leverage. This distinguishes the current situation from typical short squeeze scenarios, where lower open interest levels mean less mechanical fuel for cascade liquidations, though localized squeezes could still occur. The risk of further cascading liquidations on the downside is lower than in January.

Overall, these two indicators paint a more nuanced picture than initially apparent: leverage has exited the market (open interest down from $47.6 billion to $20.8 billion), but remaining participants mainly hold short positions (negative funding rates). This combination reduces the risk of downward liquidation cascades but also limits the potential for spontaneous short squeezes — the system has less fuel.