Bitcoin Short Squeeze | What You Need to Know

Bitcoin Short Squeeze | What You Need to Know

  • Bitcoin
  • November 21, 2022
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Gold coin Bitcoin and unfocused background graphics.
Bitcoin fell to a two-year low of under $16,000 in November 2022 Photo: tungtaechit / Shutterstock

Bitcoin’s (BTC) slump to a two-year low following the devastating collapse of crypto exchange FTX has seen short interest in the top cryptocurrency surge in recent weeks.

BTC/USD live price chart

Will a potential contagion lead to an extended cryptocurrency sell-off or will an overcrowded short market leave bears vulnerable to a bitcoin short squeeze? Let’s find out below.

What is Bitcoin?

Bitcoin is a peer-to-peer electronic payment network that facilitates the transfer of funds from one party to another without the need of an intermediary financial institution.

The network uses the proof-of-work (PoW) consensus mechanism, where miners compete to solve complex cryptographic hash puzzles to validate transactions that are updated to the public ledger. In return, miners are rewarded with bitcoin for verifying blocks of transactions.

Bitcoin (BTC), the native cryptocurrency of the network, is a hard-capped cryptocurrency. Only 21 million bitcoins can ever be mined.

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Bitcoin short interest on rise 

Bitcoin experienced a tumultuous November in 2022 as the cryptocurrency crashed to a two-year low following the collapse of FTX, one of the world’s largest crypto exchanges.

Bitcoin price hovered just above the $16,000 mark on 21 November, having posted year-to-date (YTD) losses of over 66%. The top crypto slumped to $15,588 on 9 November 2022, its lowest since late 2020, historical BTC price chart showed.

Short interest in bitcoin surged in mid November on expectations of contagion from the FTX collapse.

On 16 November, institutional cryptocurrency services firm Genesis suspended redemptions and new loan originations in its lending business in order to protect cryptocurrency liquidity within its operations.

“FTX has created unprecedented market turmoil, resulting in abnormal withdrawal requests which have exceeded our current liquidity,” tweeted Genesis.

The Wall Street Journal later reported that Genesis was seeking an emergency loan of $1bn to help the crypto lender weather the liquidity crunch.

The bearishness within the cryptocurrency market heightened on fears that the hacker who stole cryptocurrencies worth about $477m from FTX, as reported by blockchain crime analytics firm Elliptic, may soon start dumping the stolen assets in the open market.

Unsurprisingly, bitcoin short interest has surged since news of FTX’s insolvency broke in early November. The BTCUSD Shorts index published by crypto exchange Bitfinex has risen over 360% since the start of month to its highest since July 2021.

Data from Binance, the world’s largest crypto exchange, showed the long/short ratio of BTCUSDT perpetual positions among its top traders dropped to 1.02 on 21 November from 1.27 roughly a month ago.

The worst of bitcoin short selling took place on 6 November as about 57% of total accounts with BTCUSDT perpetual contracts took short positions on Binance. 

The overcrowded bitcoin short interest position resulted in a bitcoin short squeeze that occurred on 10 November – BTC rose by over 10% during the session. By 11 November, the percentage of short accounts fell to about 23.8%. 

At the time of writing (21 November), short accounts represented over 30% of total positions in BTCUSDT perpetual contracts on Binance. Bitcoin short interest ratio data was not available on Binance’s website.

Crypto market uncertainty remains elevated 

Glassnode was cautiously optimistic in a newsletter published following the market-moving collapse of the FTX exchange. The crypto analytics firm said in a 14 November note:

“Given the scale of impact, and far reaching consequences of the FTX implosion, if there was a time for HODLers to lose faith in the asset, it is likely now.”

Glassnode noted that over 48,100 bitcoins were sold in the second week of November which the research firm said was a “non-trivial event” but “not yet of a scale to infer widespread loss of conviction.” They added:

“The collapse of FTX is significant, and a real black eye to the industry … This is sadly a forest fire, and a deleveraging event that was due to happen eventually, and as is tradition, Bitcoin, and the industry will bounce back stronger.”

Blockchain research firm Chainalysis struck a similar tone in a 10 November note :

“However, crypto has survived events like this before, emerged stronger, and gone on to reach new highs. We expect asset prices to eventually recover and for cryptocurrency to resume its adoption growth.”

The current crypto investing scenario remains extremely uncertain and volatile. NYDIG Research summed up the situation in an emailed newsletter:

“With numerous companies announcing losses or exposures to FTX and Alameda, questions have been swirling as to what the next domino is to fall. There are some inklings, but the picture is not quite clear.”

Please note that analysts can be wrong about their forecasts. When looking for bitcoin short squeeze predictions, it is important to remember that cryptocurrency markets are extremely volatile.

If you are considering trading cryptocurrencies, it is recommended that you always do your own research. Keep in mind that past performance is no guarantee of future returns. And never trade money that you cannot afford to lose.

FAQs

How high can a short squeeze go?

It is not possible to predict the future accurately. Looking back at historical data, an overcrowded bitcoin short interest position resulted in a short squeeze that occurred on 10 November 2022, with BTC closing the day about 10% higher.

How often do short squeezes happen?

There are a number of factors that can lead to short squeeze which include news developments and high short interest.

What causes a short squeeze?

Overcrowded short market and a sudden upbeat development that boosts the price of an asset may cause a short squeeze.

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