Apr 10, 2024

Bitcoin’s Rally Spells Troubles for Short Sellers, Potential for $80,000

Bitcoin’s recent surge towards the $70,000 mark has sent a clear signal to the market: a short squeeze may be on the horizon. As the leading cryptocurrency teeters on the edge of this significant price point, speculations abound that short sellers are feeling the heat. The dwindling downtrends and rapidly accelerating uptrends have created a precarious situation for those betting against Bitcoin.

Institutional investors have significantly increased their net long positions, while hedge funds find themselves holding nearly 15,000 net short contracts. This widening gap between institutional longs and hedge fund shorts is a key indicator of the potential for a short squeeze. Currently, institutions hold nearly 20,000 net longs against hedge funds’ net shorts, setting the stage for a significant market event.

Bitcoin’s recent price history further underscores the likelihood of a short squeeze. Over the past week, Bitcoin has seen its price swing from a low of $61,224 on March 20 to a high of $71,511 on March 26, representing a narrow gap of just 8.7%. At its current price of $70,430, a move to $71,000 could liquidate $156.18 million in short positions, while a climb to $75,000 could result in a massive $3.85 billion in liquidated shorts.

Breaking past $71,000, Bitcoin could see a chain reaction of short covering, propelling its price to $80,000, with a potential to reach $100,000 within the year. The significant margin between institutional longs and hedge fund shorts suggests a strong bullish sentiment among institutions, indicating the potential for a rapid price increase.

However, this situation is not without its risks. The ongoing battle between long and short positions is a volatile one, with the potential for one side to crack under pressure. With asset managers holding record long exposure to Bitcoin, the stage is set for a ‘massive’ short squeeze.

Short Interest in Crypto Stocks Three Times Larger Than US Average

Additionally, the surge in Bitcoin’s price has led to significant losses for short sellers of crypto-related stocks. Today, these short sellers faced mark-to-market losses totaling nearly $1.9 billion, reflecting the impact of Bitcoin’s over 7% jump in late-day trading and almost 12% rise from its recent low just four days ago.

The total short interest in crypto-related stocks now stands at a hefty $10.7 billion, with MicroStrategy Incorporated (NASDAQ:MSTR) and Coinbase Global Inc (NASDAQ:COIN) accounting for a substantial 84% of this short interest. This figure is more than three times larger than the U.S. average of 5.13%, indicating the sector’s vulnerability to a short squeeze.

MicroStrategy, the world’s largest corporate holder of Bitcoin, leads the pack with mark-to-market losses of $1.4 billion. This amount contributes to the sector’s overall loss of $1.9 billion today and an eye-watering $5.7 billion year-to-date loss, highlighting a -79.1% downturn for those betting against the software company. Despite these significant losses, the sector remains attractive for short sellers due to its crowded nature and potential for squeezes.

The crowded scores for crypto stocks, a measure of how densely packed short sellers are in a stock, average at 57.34, significantly higher than the street average of 32.41. Additionally, the squeeze scores, indicating the potential for a short squeeze, average at 78.69, far exceeding the street average of 34.41. MicroStrategy, Coinbase, and Cleanspark Inc (NASDAQ:CLSK) are identified as the most vulnerable to squeezes in the sector.

While the sector’s total short interest has increased to $10.71 billion in 2024, indicating ongoing skepticism or strategic hedging by short sellers, the recent rally has triggered further short selling. The sector’s total short interest climbed an additional $4.50 billion in the last 30 days, mainly driven by heightened short selling in MicroStrategy.

The potential for further gains in MicroStrategy’s stock price poses a threat to short sellers, potentially forcing them to buy back shares and cut their losses. This scenario could drive the stock price even higher, creating a challenging situation for those betting against the company.

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