A bitcoin short squeeze is on the horizon, which will blast the bitcoin price into the stratosphere. That’s the thesis behind EthereumWorldNews.com’s latest article, which suggests that profitable bears face a “comeuppance” unless they cover their positions.
But how likely is the bitcoin short squeeze? And do enough people shorting bitcoin exist to make a difference in the cryptocurrency market? To examine this question, let’s first briefly review what we mean by a short trade, and the term short squeeze.
Explaining the Short Trade
For those who may be new to investment, a short position is a negative bet on an asset: essentially, you make money from betting that the asset will fall in value. To activate this gamble, a speculator typically borrows the target asset from a brokerage firm and sells it immediately.
From there, the speculator waits in anticipation of the asset falling. If it does, the short-trader then buys back the asset at a cheaper price, and returns it back to the lending brokerage firm. The profit represents the differential between the borrowed asset’s sale price, and the discounted buyback price.
Sometimes, though, the asset price works against the bears (ie. they move up). In our case, a bitcoin short squeeze occurs when the bitcoin price threatens to move significantly higher. This not only makes the trade unprofitable, the speculator stands to owe money to the lending broker. That’s because the speculator is obligated to return the borrowed asset, this time at a premium value.
In a panic, short-traders swiftly move to cover their positions; they buyback the asset before it becomes untenably expensive. Naturally, this creates buying pressure, resulting in explosive long-side profitability. You can understand now why shorting bitcoin is an extremely risky venture. But just how likely is this scenario?
The Bitcoin Short Squeeze is Real, but the Impact is Questionable
Make no mistake about it: the bitcoin short squeeze is a very real concept. Anytime investors buy cryptocurrency assets for whatever reason, the move represents net bullish sentiment. But does that necessarily mean the bitcoin price will fly to the moon?
Of course, I want this to be true. Shorting bitcoin is a hazardous operation, primarily because the bitcoin price is incredibly volatile, but has an upward bias. Therefore, I’m “long and strong,” per the oft-used phrase.
But I’m also realistic. The bitcoin price previously went through a fierce bull/bear cycle about five years ago. Mainstream analysts at the time prematurely pronounced bitcoin’s death. But they were correct in a sense: it took a long time for the bitcoin price to regain its mojo.
Not only that, we’ve seen other assets run through their own short squeeze scenario, only to disappoint investors. So I’m hesitant on saying whether the bitcoin short squeeze will yield near-guaranteed positive results.
My idea is to stay long the cryptocurrencies for their fundamental value: they present a viable alternative to traditional investment and possibly fiat-currency markets. Beyond that, everything else is a bonus.