The cryptocurrency market has shown signs of a tentative recovery following a tumultuous Monday, when over $1 billion in leveraged cryptocurrency positions were liquidated and major tokens dropped by as much as 20% in value.

Coinbase researcher David Duong said Tuesday's market conditions show the potential for a short squeeze amid increased buying activity on centralized exchanges. "We believe market jitters will persist in the short-term, but it’s possible that shorts could get squeezed here, which could lead to a market rebound in the next few days," Duong said.

Currently, cryptocurrency liquidations over the past 24 hours are about neck and neck between longs and shorts. According to Coinglass data, of the $425 million in total liquidations, around $212 million have been long positions, and just over $212 million have been short positions, as of the time of writing.

The price of crypto majors, such as bitcoin and ether, have gained by over 6% and 7%, respectively, over the past 24 hours, according to The Block's Prices Page. The global cryptocurrency market cap today is $2.04 trillion — an increase of 5.4% in the last 24 hours — according to Coingecko data.

However, the Coinbase researcher stressed that specific factors are still weighing on the cryptocurrency market. "There are in-kind bitcoin and Ethereum distributions by Genesis as part of its bankruptcy liquidation plan. The unwind of Japanese yen-based carry trades may also be affecting the decisions of Mt. Gox creditors receiving their bitcoin at the moment," Duong added.

Despite the slight price recovery, the bitcoin futures funding rate has remained negative over the past 24 hours. This suggests that demand for short positions remains high, indicating that traders are still betting on a decline in bitcoin's price.

The bitcoin perpetual futures funding rate has stayed negative after yesterday's sell-off. Image: Coinglass

The recent volatility in the cryptocurrency market comes after a broad asset sell-off in equities, with Asian and European equity markets down amid lingering fears of a global recession and the inflammation of tensions in the Middle East. For example, the FTSE 100 index in London fell 0.36% after markets opened today.

However, the heightened volatility in risk assets has begun to show signs of easing, aided by stronger U.S. ISM services data on Monday that showed signs of improvement. The Chicago Board Options Exchange's CBOE Volatility Index (VIX) had spiked from 20 to 65 intraday on Monday, this approached levels witnessed during the pandemic and global financial crisis. However, since then the volatility index has eased back to a current reading of 33.84. 

Following yesterday's market volatility, Duong said that the recent decline in the cryptocurrency market does not signal the start of a new long-term trend or market cycle. "The current pullback in the cryptocurrency market does not represent the start of a new market cycle. Rather, the current sell-off is consistent with our defensive approach in 3Q24 and more constructive outlook for 4Q24, albeit the strength of this move tests our conviction," Duong said.

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