A Case for, and Against, a Bitcoin Short Squeeze Around the Corner
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A Case for, and Against, a Bitcoin Short Squeeze Around the Corner

With Bitcoin down 38% YTD, could we see a BTC short squeeze?
Neither the author, Michelle Jones, nor this website, The Tokenist, provide financial advice. Please consult our website policy prior to making financial decisions.

The bitcoin price has been falling steadily since the beginning of the year, marking a decline of almost 38% since January. As the price continues to trend downward, there are signs that a short squeeze could be just around the corner for bitcoin.

Here’s Why a Bitcoin Short Squeeze Looks Likely

Toward the end of April, digital asset broker GlobalBlock reported that high sell volume invalidated the bull case for Bitcoin. The firm said that shorts on Binance had gotten aggressive around the lows on Bitcoin and Ethereum. Meanwhile, open interest was rising higher, while funding fell lower. GlobalBlock said those indicators suggested short-term upside resulting from a short squeeze.

That upside hasn’t appeared yet, as Bitcoin continues to march lower. However, there is a more recent sign suggesting that a bitcoin short squeeze could be around the corner. Last week, global trading platform Capital.com reported a steady decrease in retail participation in cryptocurrencies during the first quarter.

Digital asset traders on Capital.com declined 16% in February and another 10% in March. According to the data, the number of digital asset global traders, excluding the U.K., declined 3% quarter over quarter. The number of cryptocurrency contracts for difference fell by nearly 7%.

The clearest suggestion that a bitcoin short squeeze could occur soon was the steep decline in the total number of long positions in cryptocurrencies. Globally, 71% of the crypto positions were long positions. According to Capital.com, this is the lowest level since the middle of 2020. In the fourth quarter, 78% of traders on the platform were long cryptocurrencies.

Crypto Traders More Bearish on Bitcoin than Other Cryptocurrencies

The firm observed the most bullish level in the second quarter of 2021 when 81% of the positions on the platform were long. Capital.com suggested that the buy-and-hold strategy many crypto bulls have long employed is losing momentum and that crypto traders are becoming more bearish. 

However, Capital.com Chief Market Analyst David Jones finds it surprising that traders appear to be shifting toward short-selling cryptocurrencies.

Crypto traders are often driven by momentum more than any other group,” he said in a press release. “Even amid short-term volatility, the crypto faithful are likely to hold or sell their positions rather than short-sell. Crypto investors tend to be herd creatures, and many do not sell short due to their personal beliefs, so this shift towards more short-selling is surprising.”

According to Jones, crypto traders were most bullish on Vechain, Dogecoin, and Shiba Inu, with long-to-short balances ranging from 85% to 87%. However, they were the most bearish on bitcoin, with 64% of positions being long. Ethereum was slightly higher at 67% long.

Fear and Greed Index at Extreme Fear

On the other hand, the Crypto Fear and Greed Index sits at “extreme fear”, another signal that a short squeeze could be coming soon. For a short squeeze to occur, an unusually high number of traders must have a short position in bitcoin. While the above numbers do suggest that conditions are ripe for a short squeeze, a few situations are protecting against the possibility of one, so there is no guarantee that one will occur.

For example, the last time a short squeeze occurred in Bitcoin was when the price reached $40,000, so many experts from various firms and news outlets think the cryptocurrency won’t enter a short squeeze until that level is reached again. However, with the Bitcoin price sitting below $30,000 and falling steadily, it could be a while before it hits $40,000 again. As a result, a squeeze could occur lower than that, potentially if a small but sustained uptick occurs.

Something else that supports a continued decline of the bitcoin price rather than a short squeeze, which would send the cryptocurrency significantly higher, is the recent situation involving UST. TerraUSD is supposed to be a stablecoin pegged to the U.S. dollar, and the backer, Luna Foundation Guard, is supposed to maintain reserves to support its stablecoin.

LFG dumped $3 billion worth of bitcoin last week to keep its algorithmic stablecoin, now worth a mere 9 cents, from collapsing, sending bitcoin plummeting even further. Despite the plunge in the bitcoin price, an analyst at crypto research firm Messari told CNBC on Monday that there isn’t a lot of outstanding selling pressure right now, which the market will take as “kind of bullish.”

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The Bottom Line

When it comes to predicting a short squeeze in bitcoin, the primary thing to look for is a sustained price increase. Short-sellers make money by borrowing Bitcoin at a high price and then selling it at a low price, pocketing the difference between where they borrowed it and where they sold it. At this point, some Bitcoin short-sellers may have made a significant profit, so they may be looking to take some profits by covering their positions, which involves buying bitcoin so that they can repay the investor they borrowed from.

Thus, it might not take a massive increase in the bitcoin price to trigger a short squeeze. However, any sign that the bitcoin price will continue to rise for an extended period could be enough to trigger a short squeeze, which forces short-sellers to buy bitcoin to cover their positions, boosting the price in the process.

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Are you bearish or bullish on bitcoin? Do you think a short squeeze is likely? Share your thoughts in the comment section below.

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