Crypto Selloff Driven by Long Squeeze, Not Bearish Shift, as Leverage Unwinds
Thursday’s broad-based decline across crypto markets appears to be driven by the liquidation of overleveraged long positions — not a surge in bearish sentiment.
The CoinDesk 20 Index (CD20), which tracks the performance of the most liquid and prominent digital assets, fell 6.8% in the past 24 hours. Bitcoin (BTC) slipped just under 1% after failing to hold above the $120,000 mark, while altcoins saw deeper losses: Ether (ETH) dropped 3%, Solana (SOL) slid 8%, and XRP plunged 13%.
Market structure data supports the view that the downturn was triggered by a long squeeze. According to data from Velo, open interest in perpetual futures has declined notably across major tokens. XRP led the pullback with a 6% drop in open interest over the past two days. SOL futures saw a 5% reduction, while BTC and ETH open interest declined 1.5% and 2%, respectively.
At the same time, funding rates across these assets remain positive — an indication that bullish sentiment hasn’t entirely disappeared. Positive funding rates suggest traders are still paying a premium to hold long positions, and futures prices remain above spot levels.
The combination of falling prices, declining open interest, and still-positive funding rates points to the forced unwinding of long positions, not the introduction of fresh shorts. If bearish bets were driving the move, open interest would likely be climbing and funding rates would shift negative — neither of which has occurred.
Analysts say such long squeezes, while painful in the short term, are often necessary to flush out excessive leverage and reset the market. This “cleansing” process is seen as healthy for longer-term price stability.
The decline in open interest signals that traders are actively de-risking, closing positions voluntarily or facing liquidations, rather than initiating aggressive new shorts.
While prices have corrected, the structural backdrop indicates that sentiment remains resilient — suggesting the recent dip may be more of a positioning reset than a broader shift in market direction.
