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A Short Squeeze in Bitcoin Looms. What Is It?

A Short Squeeze in Bitcoin Looms. What Is It? 101
Source: iStock/SIphotography

The ever going discussion on where bitcoin price might be headed next, has intensified in the past few days. With the market still in bearish territory, many traders have taken on short positions that would enable them to profit as the price continues to decline.

Their idea is that since bitcoin has remained fairly stable over the past few days as the altcoins, including major coins like ether, litecoin, and EOS, have sold off heavily, it is bitcoin’s turn to fall next.

Bitcoin price chart

A Short Squeeze in Bitcoin Looms. What Is It? 102
Source: coinmarketcap.com

The relative strength that bitcoin has shown has also led to a spike in bitcoin’s overall dominance in the crypto market, recently reaching above 50% for the first time in 2018.

Dominance rate

A Short Squeeze in Bitcoin Looms. What Is It? 103
Source: coinmarketcap.com

Since the explosion in altcoin market capitalization occurred in mid-2017, bitcoin’s dominance rate has only reached the 50%-level for one brief period between late October and early December 2017. As such, traders may now be expecting to see bitcoin’s dominance fall again.

However, many traders also know that when “everyone” in a market believes something is about to happen, history shows that the opposite instead tends to occur. Following that logic, a large number of short sellers in a market could in fact lead to higher prices – often in a very violent way.

Bitcoin shorts reach record levels

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The total amount of BTC/USD short positions on the Bitfinex exchange is now reaching the highest levels in 12 months, while the short-to-long ratio is at its highest level since November 2017 at 1.3, as seen in the chart below:

A Short Squeeze in Bitcoin Looms. What Is It? 104

If the market starts to move upwards in the near future, many of these traders will exit their short positions by buying back bitcoins in the open market. As the price moves further up, even more short-sellers will get margin calls or hit their pre-set stop-loss levels, forcing them to cover their shorts, and creating a self-reinforcing mechanism that can cause sharp price increases. This is what traders refer to as a short squeeze.

On Wednesday, Ran Neu-Ner, host of CNBC’s Cryptotrader show, also noted that bitcoin short positions are close to a 12-month high. He added that futures contracts traded at the Chicago Board Options Exchange (CBOE) are set to expire, which has previously caused extra volatility in the bitcoin market.

Some, however, take the idea that “everyone” is now expecting a short squeeze one step further by questioning their logic in a poetic way:

It remains to be seen if we will see a giant short squeeze in bitcoin, but don’t be surprised to see strong spikes in price if the market starts to move higher from the current low levels in the next few days.

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