What happened to Bitcoin?
Bitcoin (BTC) jumped to nearly $26,000 during the asian trading hours on Tuesday, reversing Monday’s decline to three-month lows under $25,000.
The move could be best described as a short squeeze – a rally powered by an unwinding of bearish derivative bets.
As prices jumped, cumulative open interest in futures and perpetual swaps trading on Binance, Bybit, OKX and Deribit fell from $5.05 billion to $4.8 billion. Open interest refers to the dollar value locked in the number of active or open positions.
The decline in open interest seemed to stem from shorts abandoning their bearish bets, as funding rates flipped positive around the same time.
Funding rates refer to costs associated with holding bullish or bearish bets in perpetual swaps (futures with no expiry). Negative rates imply leverage is skewed on the bearish side, while positive rates suggest otherwise.
“[It’s] a textbook short squeeze,” pseudonymous trader and analyst @52kskew said on X.
Bitcoin and alternative cryptocurrencies (altcoins) fell Monday as fears of potential selling pressure from bankrupt crypto exchange FTX roiled market sentiment.
Though impressive, the price recovery from crucial support at $25,000 may remain capped due to a lack of immediate bullish catalysts. The bitcoin spot ETF optimism has faded, with observers shifting focus to the impending liquidation of FTX’s altcoin holdings.
Per some observers, the bias remains bearish while prices are held below the 50-day simple moving average.
“Bitcoin price is $25,836 below the 50-day moving average of $27,731 – which is bearish – and the week over price price decreased by 0.5%. Ethereum (ETH) price is $1,617 below the 50-day moving average $1,752 – which is bearish – and the week over price decreased by 1.1%. Overall, the trend is down, which indicates a bearish sentiment,” crypto services provider Matrixport’s Markus Thielen said.
What is a short squeeze?
A short squeeze is a market event that occurs when a heavily shorted stock experiences a sudden and significant increase in its price. It typically unfolds when traders or investors have taken short positions in a particular stock, which means they’ve sold borrowed shares with the expectation of buying them back later at a lower price.
The trigger for a short squeeze often comes from positive news or a catalyst related to the company or stock in question. This positive development could be anything that boosts investor confidence, such as strong earnings reports, favorable regulatory decisions, or exciting product announcements.
As this positive news circulates, it drives up the stock’s price. As the stock price rises, short sellers start to incur paper losses, and their potential losses become unlimited if the price continues to climb. This growing risk prompts some short sellers to take action to limit their losses. They do this by covering or closing their short positions, which involves buying back the shares they initially borrowed and sold.
The act of short sellers covering their positions by buying shares adds further upward pressure on the stock price. This creates a feedback loop where more short sellers rush to cover their positions as the price keeps rising. This sudden surge in buying activity can result in a rapid and dramatic increase in the stock’s value, causing significant losses for those who were shorting the stock.
Short squeezes can be highly volatile and unpredictable events in the financial markets. They often lead to sharp price spikes and can result in substantial losses for short sellers who are caught on the wrong side of the trade.
