The number of short orders placed on bitcoin is less than 3 percent – or 1,196 orders – away from setting a new all-time high, according to data from cryptocurrency exchange Bitfinex.

As of 16:00 UTC Tuesday, there are 39,524 short orders outstanding, marking its highest level in more than four months. Shorts have only been higher on one occasion: April 12, when the figure reached 40,719 orders. 

Bitcoin shorts of this amount speaks volumes about the prevailing market sentiment being overwhelmingly bearish, given that investors continue to bet that the price of the cryptocurrency will sink further in the near term.

There is cause to caution the bears, however. Since more than 16,000 shorts were opened at a bitcoin price below $6,700 (Aug. 8th through today), a less than 4.5 percent increase in bitcoin's current price of roughly $6,435 could cause a significant portion of the total shorts to cover, or have to buy BTC back in order to close their losing position.

Such an occurrence can cause prices to quickly rise even further due to the increase in buy orders, an effect known as a "short squeeze."

A short squeeze of this nature is not without merit as a near-identical situation came to fruition on April 12, the same day shorts reached an all-time high. On that day, bitcoin opened at a price of $6,943 but ultimately reached a 24-hour high of $8,087 as a result of a significant amount of short orders needing to be closed.

As seen in the above chart, circumstances between April 12 and today are very similar.

On both occasions, price traveled sideways in the mid-$6,000 range following a steep downswing in prices. This allowed for the emboldened bears to put up an abundance of short orders on Bitfinex, depicted by the red line indicator.

What's more, the relative strength index (RSI), an indicator used to identify "overbought" or "oversold" market conditions, is printing a near identical daily value (~44) as on April 12th.

Indeed, the stage is set for a massive short squeeze, but there is no guarantee bitcoin prices will rise enough to force those shorting to close their positions.

Until then, both bears and bulls are waiting eagerly and watching as the events unfold.

Disclosure: The author holds BTC, AST, REQ, OMG, FUEL, 1st and AMP at the time of writing.

Image via Shutterstock; Charts via TradingView