Bitcoin is caught in a “liquidation cycle” where high-risk positions are being systematically targeted.

The recent movements in Bitcoin’s price exhibited a recognizable pattern: leverage increased following a bounce, funding became supportive for long positions, and the market subsequently targeted the most vulnerable areas until forced selling took precedence.

BTC fluctuating within the $80,000 range results from futures positioning. Recent data highlighted approximately $794 million in Bitcoin long liquidations this week as it reached around $87,800, with liquidation “hot zones” extending downwards towards $80,000.

Graph illustrating total Bitcoin liquidations from January 1 to January 23, 2026 (Source: CoinGlass)

Contextualizing this within derivatives reveals that perpetual futures are no longer a side consideration. Kaiko estimates that BTC perpetuals comprised about 68% of Bitcoin’s trading volume in 2025, while derivatives as a whole accounted for over 75% of overall crypto trading activity.

Thus, when the primary venue for price discovery is a leveraged instrument intended for frequent repositioning, short-term price movements increasingly rely on how risk is managed, funded, and ultimately unwound, rather than marginal spot demand.

How perpetual futures create a liquidation treadmill

Perpetual futures align with spot prices through a funding mechanism. When perpetual prices exceed the spot index, funding becomes positive, causing longs to pay shorts; conversely, when perpetual prices dip below spot, funding turns negative, and shorts pay longs. This “funding” represents a periodic transaction between long and short traders based on the disparity between the perpetual contract’s market price and the spot index, recalibrated multiple times daily with an eight-hour interval on its platform.

However, funding serves a greater purpose than merely keeping prices aligned. The mechanism establishes a consistent incentive gradient that influences positioning. In a bullish market, traders pursue upward momentum using leverage. Perpetuals facilitate this, and the cost of maintaining that exposure manifests in funding.

When funding remains consistently positive, it indicates that long positions are crowded to the extent that longs are paying to sustain them. This crowding is not inherently bearish or bullish, but it amplifies the market’s sensitivity to minor downward movements, as these leveraged positions operate with narrow error margins.

Chart depicting the funding rate for Bitcoin perpetual futures on Bitmex and Binance from October 25, 2025, to January 23, 2026 (Source: CoinGlass)

The mechanics of liquidation transform that sensitivity into a feedback loop. On Binance, liquidation commences when a trader’s collateral falls below the maintenance margin necessary to keep the position active. This is critical: once maintenance is breached, the exchange assumes control of the position and sells into the market to mitigate risk. These forced sales drive prices lower, which then pressures the subsequent layer of leveraged longs, triggering additional forced sales.

This loop constitutes the treadmill. Traders re-enter during bounces because the preceding liquidation flush fosters a temporary perception of “cleaner” positioning and a more favorable risk-reward ratio. However, if the market continues to be erratic, the next downward price movement locates a new layer of leverage and the cycle repeats.

This also clarifies why intraday volatility may seem largely disconnected from macro narratives. A catalyst may initiate a move, but the nature of that move is often determined by the mechanics of perpetual trading.

Research on crypto perpetuals has revealed that perpetual markets correlate with changes in spot liquidity patterns and heightened trading intensity around funding settlement times, thereby supporting the theory that perpetual microstructure significantly influences short-term price formation. The practical implication is straightforward: when a significant portion of activity resides in perpetuals, the market becomes reflexive.

The long liquidations we observed this week are a useful scale indicator, making the drop below $90,000 appear more like a leverage flush than a mass exit from the spot market.

There are no straightforward, single-print events in this type of market. The treadmill generates a sequence: a rapid downward leg, a controlled bounce, and then a subsequent downward leg that seeks deeper liquidity. The liquidation hot zones extending toward $80,000 illustrate how these hunts operate. Liquidity tends to concentrate at levels where numerous positions would be forcibly exited, and the market typically seeks out these pools when order books become thin.

Reading the tape: heatmaps, open interest, and what breaks the loop

The most straightforward method to visualize treadmill risk is by mapping where forced flows are likely to occur.

Liquidation heatmaps serve as a tool to forecast potential large-scale liquidation points by examining trading data and leverage levels, highlighting areas where liquidations may converge. They are not guarantees, but they do reflect a significant reality: liquidations are not evenly distributed across prices. They cluster because leverage tends to group together, as many traders utilize similar levels, similar liquidation thresholds, and analogous risk models.

A secondary essential tool is open interest (the total value of outstanding futures contracts). Open interest serves as a measure of positioning rather than a directional indicator on its own. The signal emerges from combining it with price and funding. An increasing price alongside rising open interest and funding often indicates that leverage is accumulating with the trend. Conversely, a declining price with diminishing open interest suggests that positions are being liquidated, often through forced exits.

Graph showcasing the total size of BTC perpetuals and delivery futures from January 23, 2025, to January 23, 2026 (Source: CoinGlass)

This implies that if the market truly has less leveraged exposure below a certain threshold, a dip into that range can transition from forced selling to discretionary buying more rapidly. Traders should approach this as a hypothesis to evaluate, not a conclusion to accept. The test lies in the data: whether open interest significantly declines during the selloff, whether funding resets, and whether liquidation prints decrease after the flush.

So what disrupts the treadmill?

There are only a few enduring circuit breakers. A sustained reduction in leverage manifests as lower open interest, less extreme funding, and fewer large-scale liquidations. A robust spot bid is slower and less reflexive than perpetual positioning and can absorb forced flows. A shift in the volatility regime alters the incentive to employ high leverage by compressing or expanding the opportunity set. By distinguishing between derivatives-driven intraday movements and the influence of spot over longer periods, we can grasp the fundamental hierarchy: perpetuals can guide the trajectory, and then spot tends to determine whether a level ultimately holds.

Funding, open interest, and liquidation intensity are the three variables that maintain the treadmill’s momentum, and they typically progress in a recognizable sequence. Funding measures how crowded a trade has become because it represents the cost of maintaining exposure when perpetuals deviate from their spot reference.

Open interest provides the second layer of context since it differentiates a mere dip from an actual risk reduction. The definition of open interest as outstanding contracts is straightforward, but the interpretation hinges on the interaction with price and funding. A decline that coincides with a significant drop in open interest and a reset in funding signifies that leverage is being unwound. When price declines while open interest remains stable and funding continues to support longs, fragility often persists beneath the surface. Liquidation prints then serve as practical confirmation of the extent of active forced selling, and this week’s $794 million in long liquidations offers a solid benchmark for what a flush resembles at this stage of the cycle.

Heatmaps fit into this framework as a means to visualize where stress is likely to accumulate. Liquidations cluster where positioning concentrates. Data indicating liquidation “hot zones” extending down toward $80,000, with thinner leveraged exposure below, becomes most relevant when cross-referenced with those same positioning signals, as dwindling exposure only matters if leverage indeed clears rather than quickly resurfaces on the next bounce.

A final aspect involves distinguishing offshore perpetual activity from regulated futures markets. When perpetual-driven reflexivity prevails, the path tends to be uneven and shaped by liquidations; when spot demand starts to absorb forced selling, the market’s character transforms, and the treadmill loses its grip.

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