With sentiment around Ethereum (ETH) in the dumps in the past few months, it is unsurprising that investors are seeking opportunities to profit from the asset’s perceived price weakness. However, according to prominent crypto analytics firm CryptoQuant, these investors may soon be in for a rude awakening.

Is an Ethereum short squeeze coming?

Look Out Ethereum (ETH) Short Sellers!

CryptoQuant has warned there is a near possibility of an Ethereum short squeeze. An analyst from the firm shared this view in a post on Tuesday, October 22, citing the rising Estimated Leverage Ratio and the overall bearish sentiment around the asset.

The Estimated Leverage Ratio is a metric that compares the balance of open interest in futures contracts to the balance of the corresponding exchange. It is used to determine the amount of leverage in a market, which also helps gauge the risk appetite. 

According to the analyst, this metric has been rising in recent months in line with recent price declines and has now reached “concerning levels,” suggesting that more traders were opening high-leverage short positions. 

"With leverage at concerning levels, the futures market is now considered overheated. This leaves Ethereum vulnerable to a potential short-squeeze event. In such a scenario, if ETH's price rises unexpectedly, traders with short positions could be forced to cover their positions by buying back ETH, creating an impulsive price spike," the CryptoQuant analyst wrote.
According to the CryptoQuant report, this price spike will likely be triggered if ETH crosses its near-term resistance around the $2,700 price level. 

The analysis comes as the asset has recently shown glimmers of strength.

Ethereum (ETH) Building Momentum?

Last week, ETH experienced a 7% rally, surging from around the $2,500 price level to near two-month highs around the $2,800 price point. Amid the rally, several analysts shared a positive outlook on the asset, setting short-term targets at the $3,000 price point.

Fast forward to this week, however, and these projections have yet to materialize. At the time of writing, the asset has shed most of its gains to trade around the $2,500 price point.

On the Flipside 

A short squeeze does not guarantee a sustained price rally.

Despite Ethereum’s price woes, it remains up nearly 10% year-to-date (YTD).

Why This Matters

A short squeeze could result in millions of dollars in losses for Ethereum short sellers and trigger an impulsive price move to the upside.

Source : DailyCoin - Oct 24, 2024