Unlike traditional financial markets, the crypto market is highly volatile and active 24/7, this presents unique opportunities and specific price movements, trading patterns and correlations which merit observation and understanding, particularly for actively managed crypto funds such as BitBull’s. In this article, we will discuss how a short squeeze is often responsible for propelling Bitcoin price even higher after a major jump.

A recent example of such market activity is the surge in Bitcoin price seen between April 1 and April 2, 2019, where BTC rose by over $700 as a result of several large purchases of Bitcoin, from $4105 to $4880, pushing the price up, then squeezing the shorts of other investors. In this article, we will discuss how a short squeeze is often responsible for propelling Bitcoin price even higher after a major jump.

How Bitcoin shorting works

Before we talk about short squeezes, we need to touch upon shorting or short selling as a trading strategy. Even though the crypto community promotes ‘hodling’, which is effectively going long on Bitcoin (or any other cryptocurrency), short selling is a prevalent practice and several exchanges, like Bitmex, Bitfinex, and Kraken, allow it via margin trading.

A trader who believes Bitcoin price will appreciate, simply has to buy it. But one who thinks it is going to decline has to short it (or sell it now), by borrowing it from an exchange or a broker (and pay margin interest). The idea here is that the short seller will buy back the owed Bitcoins when their price declines and keep the difference as profit.

For instance, if a short seller shorts one Bitcoin at $5,000 and the price then falls to $4,000 – he only has to buy one Bitcoin back (at the new, lower price) to cover his short and pay back the exchange, making a $1000 profit.

How Short Squeezes Result in Major Bitcoin Price Jumps

However, short selling has considerably more risks than simply buying Bitcoin for future appreciation. When you purchase a Bitcoin, your possible loss is capped at the price you paid for it, but when one shorts it, the margin for loss is virtually unlimited.

Taking our previous example, if the trader shorts Bitcoin at $5,000 but the price continues to appreciate instead of declining, he will have to pay out of pocket to cover his short and buy back one Bitcoin from the market. Hence, the more expensive it gets, the bigger his losses become.

In order to prevent such losses, short sellers have to set risk limits, and based on those, their contracts are liquidated when their margins are reached.

For example, if a lot of traders shorted Bitcoin at $5,000 with a margin of $1,000, their short liquidation price would be $6,000. This means, if Bitcoin surges to $6,000 due to any factor, all the short contracts will be liquidated (the traders will be forced to buy back every Bitcoin they shorted, at the new price of $6,000). This forced liquidation will essentially translate to even more buying momentum (after the actual surge to $6,000) and ‘squeeze’ the price higher, in what is known as a short squeeze.

Given all this, keeping tabs on market dynamics, not just regular trading but also margin trading, can help active managers stay ahead of the curve and leverage such opportunities to maximize returns. You can learn more about crypto trading strategies and market updates via our blog, or contact us to learn about our managed crypto funds.

Disclosure:

As of the publication date of this report, BitBull Capital Management LLC and its affiliates (collectively “BitBull”), others that contributed research to this report and others that we have shared our research with (collectively, the “Investors”) may have long or short positions in and may own options on the token of the project covered herein and stand to realize gains in the event that the price of the token increases or decreases. Following publication of the report, the Investors may transact in the tokens of the project covered herein. All content in this report represent the opinions of BitBull. BitBull has obtained all information herein from sources they believe to be accurate and reliable. However, such information is presented “as is,” without warranty of any kind – whether express or implied.

This document is for informational purposes only and is not intended as an official confirmation of any transaction. All market prices, data and other information are not warranted as to completeness or accuracy, are based upon selected public market data, and reflect prevailing conditions and BitBull’s views as of this date, all of which are accordingly subject to change without notice. BitBull has no obligation to continue offering reports regarding the project. Reports are prepared as of the date(s) indicated and may become unreliable because of subsequent market or economic circumstances.

Any investment involves substantial risks, including, but not limited to, pricing volatility, inadequate liquidity, and the potential complete loss of principal. This report’s estimated fundamental value only represents a best efforts estimate of the potential fundamental valuation of a specific token, and is not expressed as, or implied as, assessments of the quality of a token, a summary of past performance, or an actionable investment strategy for an investor.

This document does not in any way constitute an offer or solicitation of an offer to buy or sell any investment or token discussed herein.

The information contained in this document may include, or incorporate by reference, forward-looking statements, which would include any statements that are not statements of historical fact. These forward-looking statements may turn out to be wrong and can be affected by inaccurate assumptions or by known or unknown risks, uncertainties and other factors, most of which are beyond BitBull’s control. Investors should conduct independent due diligence, with assistance from professional financial, legal and tax experts, on all tokens discussed in this document and develop a stand-alone judgment of the relevant markets prior to making any investment decision.

This blog may contain forward-looking statements that are based on BitBull’s experience and expectations about the markets in which the fund invests and operates. Forward-looking statements are sometimes indicated by words such as “anticipates,” “expects,” “believes,” “seeks,” “may,” “intends,” “plan,” “should,” “attempts,” “will,” “intended to,” “designed to,” “seeks to” or the negative of these terms or other similar expressions. Undue reliance should not be placed on such forward-looking statements as such statements speak only as of the date on which they are made. Forward-looking statements are not guarantees of future performance and are subject to many risks, uncertainties and assumptions that are difficult to predict. Actual results may differ, and such differences may be significant. Neither the fund nor BitBull Capital undertakes any obligation to revise or update any forward-looking statement for any reason, unless required by law. The forward-looking statements contained in these blogs are expressly qualified by this cautionary statement.

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