Recent data from CryptoQuant suggests that a short squeeze in Ethereum may be brewing. The funding rate is an indicator that tracks the fees traders pay each other on futures contracts.
When the funding rate is positive, it means long contract holders are paying a premium to short holders, indicating overall bullish sentiment. Negative funding rates imply the opposite – shorts are paying fees and bearish sentiment prevails.
The chart shows Ethereum’s funding rate was positive until a couple of days ago, meaning most traders expected prices to rise. But it has now turned negative, signaling a swift change to bearish sentiment among investors.
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While this shift seems bad for prices at first glance, history shows that when sentiment becomes extremely one-sided, a sharp reversal often follows. The reason is that sudden price swings tend to liquidate the dominant side of the market.
These liquidation cascades, known as squeezes, provide fuel for the initial price move that triggered them. With shorts piling up recently, the chances of a short squeeze are increasing. If it happens, Ethereum could see a forceful bounce.
Of course, a squeeze may not materialize right away, if at all. The funding rate stayed positive for a period before Ethereum’s latest decline. But the data highlights the growing possibility of a climax in bearish sentiment and the potential for a bullish turnaround.