Bitcoin Shorts Reach All-Time Highs During Low Market Cycle, What’s Next?
Bitcoin short positions have been ranging near their all-time highs during the past month, signaling that traders are giving up hope that Bitcoin will maintain its current price of over $7,200. On September 1st, a notable 10,000 BTC short position was opened, bringing Bitcoin short positions back near their all-time high as Bitcoin shows relative stability in the low $7,000s.
Bitcoin Shorts Reaching All-Time Highs Could Act as Bitcoin Contrarian Indicator
Bitcoin shorts first reached their highest year-to-date position on April 9th, while Bitcoin was trading at approximately $7,000. At this point, short positions reached a year-to-date high of just over 38,000 open positions, which had slowly been growing from early February. In the month following short positions reaching this new high, BTC price climbed from $7,100 on April 9th, to just under $10,000 on May 5th.
Although this example of correlation between a large quantity of open short positions and a preceding price climb in Bitcoin is inconclusive, the same price reaction occurred in early August, when short positions climbed from 17,000 open positions on August 2nd to just under 40,000 open positions on August 21st. The over 2x increase in open BTC shorts corresponded with BTC falling from over $8,000 in late July, to just over $6,000 on August 13th, which drove many alt-coins to their year-to-date lows, crushing market sentiment.
Just after open short positions peaked at nearly 40,000, they crashed to approximately 22,000, which coincided with Bitcoin’s price rise from $6,000 to over $7,000 which occurred during a similar time range.
Many traders speculate that overly confident short positions act as “rocket-fuel” for market rallies, due to what is commonly referred to as a “short squeeze.”
Investopedia offers a simple, yet informative, explanation of what a short squeeze is:
“A short squeeze is a situation in which a heavily shorted stock or commodity moves sharply higher, forcing more short sellers to close out their short positions and adding to the upward pressure on the stock. It…is generally triggered by a positive development that suggests the stock may be embarking on a turnaround. Although the turnaround in the stock’s fortunes may only prove to be temporary, few short sellers can afford to risk runaway losses on their short positions and may prefer to close them out even if it means taking a substantial loss.”
New 10,000 Bitcoin Short Position Leading to Intense Speculation
Bitcoin traders and investors are now contemplating what the results of the new 10,000 BTC short position opened on September 1st will be, with debate on whether it will result in a short squeeze or in a price drop due to manipulation and profit taking.
Chris Burniske, a partner at Placeholder VC, examined the situation on a Twitter thread, explaining what the potential results of this massive short position could be.
“The interesting thing with outstanding short positions as an indicator is it can simultaneously be interpreted in opposite ways. From a momentum perspective, lots of short positions can be interpreted as a good time to pile on, as shorts collectively work to break an asset’s back. From a contrarian perspective, lots of short positions can be seen as ‘rocket fuel’ to the upside if the shorts are wrong and get squeezed…”
It is clear that although short positions reaching their all-time highs are usually preceded by short term rallies, the price could go either way based on whether or not bulls or bears are the ones providing the pressure.
Burniske ends his thread with advice for traders and speculators, saying “I’ll let you choose your interpretation re: $BTC right now, but important to hold both opposing ‘short thoughts’ in your mind at the same time.”
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