Bitcoin has seen a sharp change in how big funds are positioned. Hedge funds that use leverage have cut their short positions by a large amount. Their total short exposure dropped from a very high level last year to a much smaller level by mid January. This is a big move and it has started a fresh debate. Some see it as a positive sign. Others think it calls for care.
In past market cycles a strong drop in short positions often happened near local price bottoms. When funds stop betting against price it can reduce selling pressure. This has sometimes helped Bitcoin find support. Because of this some traders believe the current setup could favor a rebound. Still this signal alone is not enough to confirm a rally.
To understand the full picture it helps to look at how these funds usually trade. Many hedge funds run what is called a basis trade. They buy spot Bitcoin through approved funds and at the same time short futures contracts. The goal is to earn the price gap between the two markets. This works best when that gap is wide.
Over recent months this yield has fallen a lot. It moved from near ten percent to around five percent. At the same time Bitcoin price dropped by more than thirty percent. This made the trade less attractive. When the reward shrinks funds often reduce both sides of the trade. That means fewer futures shorts but also less buying of spot Bitcoin.
This change has already shown up in fund flows. After strong demand earlier in January the market saw heavy outflows this week. More than one billion dollars left spot Bitcoin funds. This pushed the monthly average flow back into negative territory. It shows that large investors are still cautious and not rushing back in.
Because of this a drop in short positions does not automatically mean price will rise. Without steady inflows into spot products any upside move may struggle to hold. In simple terms less betting against Bitcoin helps but strong buying is still needed.
The wider market mood also played a role. Earlier in the month investors moved into risk off mode. Global tensions and stress in the Japanese bond market made many prefer safety. This pressure affected all risk assets including Bitcoin.
Some of these risks now appear to be easing. Market watchers expect the coming week to be calmer. The main event left is the central bank rate decision later in the month. There is also growing talk that global policy makers may act to stabilize the Japanese yen. Recently the yen showed a strong move higher on this idea.
Some analysts believe this kind of action could add fresh liquidity to markets. If that happens assets like Bitcoin could benefit. Others point out that Bitcoin has already moved out of a high risk zone based on momentum and volatility measures. They compare the current setup to the period before the rally seen in the second quarter of last year.
At the time of writing Bitcoin trades just under ninety thousand dollars. The market is no longer in panic mode but it is also not showing strong confidence yet.
In the end the message is balanced. Hedge funds cutting shorts is a meaningful shift. The risk backdrop looks better than before. Still weak demand from large buyers keeps the outlook mixed. Bitcoin may be setting a base but the next clear move will depend on whether real buying returns.
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