According to on-chain analytics firm Glassnode, a rapid increase in Bitcoin (CRYPTO: BTC) futures leverage might lead to either a short or long squeeze "in the more immediate term."
As to Glassnode stated, in its last The Week Onchain report for 2021:
“Whilst futures open interest is still some way off all-time-highs, rapid increases in leverage can indicate a clustering of stop-losses and liquidation levels in close proximity to the current price.”
This growth in leverage “adds higher probabilities to a potential short, or long squeeze in the more immediate term.”
Meanwhile, one expert predicted that the current market conditions make a bearish long squeeze more likely than a short squeeze.
“Now funding rising the last few hours as price grinding down..,” said Will Clemente, a Bitcoin analyst at Blockware Solutions. He continued to explain that these conditions are more favorable for a long squeeze than a short squeeze.
A leverage squeeze is an occurrence where the price quickly drops or rises, with the advancement exacerbated by leveraged traders whose trading positions are being liquidated as a result of the price movement.
A long squeeze occurs when prices fall rapidly, while a short squeeze happens when they rise rapidly.
While Glassnode acknowledged that there is a risk of a leveraged squeeze in the near term, they added that trading volumes in the bitcoin futures market have also dropped.
The decline in trading volume has been particularly notable in December, with the 7-day moving average of volume now being 16% lower than at the start of the year.
The report indicated, “thinner volume, and rising open interest (in a concentrated exchange) is a combination that can be favorable to at least a localized leverage squeeze over the coming weeks." While the firm also acknowledged that lower trading activity is typically observed at the end of the year.