Bitcoins (BTC) collapse to its lowest level in two years following the collapse of crypto exchange FTX saw brief interest in the biggest rise in cryptocurrencies in recent weeks.
BTC/USD live price chart
Will potential contagion lead to expanded cryptocurrency sale 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 for an intermediary financial institution.
The network uses proof of work (PoW) consensus mechanism, where miners compete to solve complex cryptographic hashing puzzles to validate transactions that are updated in the public ledger. In return, miners are rewarded with bitcoins for verifying blocks of transactions.
bitcoin (BTC), the network’s native cryptocurrency, is a hard-capped cryptocurrency. Only 21 million bitcoins can be mined.
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Short interest on bitcoin on the rise
Bitcoin had a tumultuous November in 2022 as the cryptocurrency slumped to its lowest level in two years after the collapse of FTX, one of the largest crypto exchanges in the world.
Bitcoin price hovered just above the $16,000 mark on Nov. 21, after posting year-to-date (YTD) losses of more than 66%. The top crypto dropped to $15,588 on November 9, 2022, its lowest since late 2020, according to the historical BTC price chart.
Short-term interest in bitcoin surged in mid-November on expectations of contagion from the FTX crash.
On Nov. 16, institutional cryptocurrency services company Genesis suspended redemptions and new lending in its lending business to protect cryptocurrency. liquidity within its operations.
“FTX has created unprecedented market turbulence resulting in abnormal withdrawal requests that have exceeded our current liquidity,” tweeted Genesis.
However, FTX created unprecedented turbulence in the market, resulting in abnormal withdrawal requests that exceeded our current liquidity.
— Genesis (@GenesisTrading) November 16, 2022
The the wall street journal later reported that Genesis was seeking a $1 billion emergency loan to help the crypto lender weather the liquidity crunch.
The bearish trend in the cryptocurrency market intensified on fears that the hacker who stole cryptocurrencies worth around $477 million from FTX, as reported by the cryptocurrency firm. blockchain crime analysis Ellipticalcould soon begin selling the stolen assets on the open market.
Unsurprisingly, interest in bitcoin shorts has increased since news of FTX’s insolvency broke in early November. The BTCUSD Shorts Index released by crypto exchange Bitfinex has risen more than 360% since the start of the month to hit its highest since July 2021.
Data from Binance, the world’s largest crypto exchange, show the long-to-short ratio of BTCUSDT perpetual positions among its top traders fell to 1.02 on Nov. 21 from 1.27 about a month ago.
The worst bitcoin shorting occurred on November 6, with around 57% of total accounts with BTCUSDT perpetual contracts going short on Binance.
The overcrowded bitcoin short interest position resulted in a bitcoin short press which happened on November 10 – BTC was up more than 10% during the session. As of November 11, the percentage of overdrawn accounts has fallen to around 23.8%.
At the time of writing (November 21), short accounts accounted for over 30% of total positions in BTCUSDT perpetual contracts on Binance. Bitcoin short interest rate data was not available on the Binance website.
Crypto Market Uncertainty Remains Elevated
Glassnode was cautiously optimistic in a newsletter published following the FTX exchange market crash. The crypto-analytics firm said in a November 14 Remark:
“Given the scale of the impact and far-reaching consequences of FTX’s implosion, if there was ever a time when HODLers lost faith in the asset, it’s probably now.”
Glassnode noted that more than 48,100 bitcoins were sold in the second week of November, which the research firm said was a “significant event” but “not yet of sufficient magnitude to infer a loss. of generalized belief”. They added:
“The collapse of FTX is significant and a real black eye for the industry…It is unfortunately a wildfire and deleveraging event that was ultimately meant to happen, and as tradition dictates , Bitcoin and the industry will rebound stronger. ”
Blockchain research firm Chainalysis adopted a similar tone on November 10. Remark :
“However, crypto has survived events like this before, gotten stronger, and hit new highs. We expect asset prices to eventually recover and cryptocurrency to resume adoption growth.
The current crypto investment scenario remains extremely uncertain and volatile. NYDIG Research summarized the situation in an email newsletter:
“With many companies announcing losses or exposures to FTX and Alameda, questions have swirled as to what will be the next domino to fall. There are some suspicions, but the picture is not entirely clear.
Please note that analysts can be wrong about their forecasts. When researching 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 does not guarantee future returns. And never trade money you can’t afford to lose.
How far can a short press go?
It is not possible to predict the future with precision. Looking at historical data, a crowded bitcoin short interest position led to a short squeeze that occurred on November 10, 2022, with BTC closing the day up around 10%.
How often do short compressions occur?
There are a number of factors that can lead to a compression of short positions, including news developments and high interest in short positions.
What causes a short squeeze?
A crowded short market and a sudden bullish move that pushes an asset’s price up can lead to short-term compression.
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