Analyst: The current market has significantly deleveraged, reducing the likelihood of a sharp downturn, but at the same time limiting the upside short-squeeze potential

On March 5, independent crypto analyst Axel said in a post that Bitcoin’s perpetual contract funding rate has stayed in negative territory through the first half of March 2026—suggesting short positions are dominating the perpetual futures market. Since late January, the funding rate has repeatedly fallen into negative territory, and over the past two weeks, it’s lingered there with little to no bounce back. The most extreme readings hit on February 25 and 28—both days when Bitcoin was testing local lows around $64k to $65k. As of March 4, the rate is still slightly negative, but the two-week cumulative negative funding rate signals a continued bias toward short positions. A negative funding rate means short holders pay fees to long holders to keep their contracts open—indicating a bearish bias. Historically, this setup either hints at a potential short squeeze if upward momentum picks up, or confirms a bearish trend if the downturn continues. The main trigger for a sentiment shift is the funding rate moving back to sustained positive territory, while Bitcoin consolidates above key resistance (around $70k) and open interest stabilizes or rises. Also, USD-denominated Bitcoin futures open interest has dropped from a peak of $47.6 billion in October 2025 to $20.8 billion in March 2026. While the BTC price drop contributes to this decline, the overall trend shows less derivatives leverage during the current adjustment phase. USD-denominated futures open interest is down more than half from its October 2025 peak ($47.6B) and roughly a third from its January high ($32B). As of March 4, it’s at $20.8B—a level not seen since before the 2025 bull run started. Over the past week, open interest has fallen 3.2%; deleveraging is still happening, though at a slower pace. Falling open interest paired with a price drop signals forced or voluntary liquidations—meaning the market is shedding leverage. This sets the current setup apart from a typical short squeeze, where the “fuel” to trigger a liquidation cascade is usually weaker at lower open interest levels, though localized squeezes are still possible. The risk of a downside liquidation cascade is lower now than it was in January. All told, the picture from these two indicators is more nuanced than it first looks: leverage has left the market (open interest down from $47.6B to $20.8B), but most remaining participants are short (reflected in the negative funding rate). This mix cuts the risk of a downside liquidation cascade but also caps the potential for a spontaneous short squeeze—there’s less fuel in the system now.