Is Bitcoin's Deleveraging Finally Over? A Deep Dive into the Derivatives Data
Bitcoin's recent price plunge to $81,119 on January 30 brought a derivatives market twist: forced long closures skyrocketed, yet perpetual funding remained firmly positive. This paradoxical mix is sparking debates about whether the market has truly 'cleansed' leverage or is poised for more liquidation waves.
The Debate: Deleveraging or Not?
On-Chain analyst Axel Adler Jr. highlights a 'cascade of forced closures' in his Morning Brief, with long liquidations dominating. His liquidation dominance oscillator shows a staggering 97% long liquidation dominance, and a 30-day moving average of 31.4%. This suggests a heavily one-sided deleveraging pressure, not just on that day but over the past month.
Why the Focus on Extremes?
Traders pay close attention to these extreme levels because liquidation flows often cluster and then subside, creating opportunities for short-term stabilization. However, Adler emphasizes that an extreme reading doesn't guarantee sellers are finished. He explains:
"Extreme oscillator readings often mark the peak of forced selling, potentially leading to short-term stabilization. However, this isn't a reversal signal. To confirm a sustainable 'local bottom', we need to see the oscillator normalize to zero or a decline in the 30-day average."
The First Condition for Deleveraging Completion: Cooling the Liquidation Imbalance
Adler's analysis sets a crucial condition for declaring deleveraging 'over': the liquidation imbalance needs to cool down, not just peak. This means the intense pressure on longs needs to ease.
The Funding Conundrum: Positive Despite Selloff
The bigger puzzle is that even after the price washout and liquidation cascade, funding remained positive at 43.2% annualized. While this is significantly lower than the 100%+ levels seen during October-November peaks, it still indicates a market paying to stay long rather than being paid to short.
Funding's Double Role: Sentiment and Positioning
Funding isn't just a sentiment indicator; it reflects positioning pressure. If funding remains positive despite a selloff, it could mean longs are quickly rebuilding their exposure, or the market never fully unwound bullish leverage. Adler warns that the latter risk remains a concern.
"Positive funding amid massive liquidations heightens the risk of repeated deleveraging. This suggests the market is either rapidly recovering long positions or not ready to fully unwind them. Complete 'derivatives capitulation' often involves funding transitioning to neutral or negative. This hasn't happened yet."
The Long-Term Incentives: A Fragile Market
The key takeaway is that even after the liquidation event, incentives in perps still favor long demand. This fragility persists: a fresh downside impulse could turn newly reloaded longs into liquidation fuel again.
Adler's Conclusion: Incomplete Deleveraging?
Adler summarizes the situation as a likely incomplete deleveraging process. The market has flushed leverage once, but may not be finished if long appetite remains strong through drawdowns. Until further confirmation, his base case leans towards 'incomplete deleveraging' rather than 'final capitulation'.
At press time, BTC traded at $82,968.
