Is bitcoin headed for a GameStop-type short squeeze?

Written by Ciaran Ryan. Posted in Journalism

Demand from retail and institutional investors has created a supply shortage, which could mean trouble for those shorting bitcoin. From Moneyweb.

The Reddit traders saw their GameStop victory as a blow against the evil Wall Street empire, but bitcoin is already seen as a cradle of rebellion. Image: Bloomberg
The Reddit traders saw their GameStop victory as a blow against the evil Wall Street empire, but bitcoin is already seen as a cradle of rebellion. Image: Bloomberg

The war between Wall Street and retail investors may have started with GameStop, but it won’t end there. The field of battle has moved on to silver and, perhaps, bitcoin.

Hedge funds shorting GameStop – effectively betting the share price would drop as this dinosaur gaming business slowly shut its doors – got beaten to a pulp when day traders on a Reddit forum coordinated buying to drive the price up from around $17 to $347 before it dropped again to around $90. The Reddit crowd did it for fun and for profit.

Read:‘Game over’ for hedge fund

Based on the commentary around this, most people enjoyed seeing short sellers get the eyeballs squeezed out of their skulls. This may not be a passing fad. The Reddit crowd has gained millions of enthusiastic followers, and is now on the hunt for other hedge funds to beat up. Their attention moved to silver, which rallied 13% to over $30/oz earlier this week before running out of steam as the #silversqueeze hashtag trended on Twitter.

And then there’s bitcoin. Take a look at the following graph showing the number of open short positions by hedge funds on bitcoin from the Chicago Mercantile Exchange (CME). Funds have increased their short positions to about $1.4 billion just as the bitcoin went on its parabolic run above $40 000 earlier this year.

Source: Chicago Mercantile Exchange

What’s clear from the above chart is that hedge funds are on their own on this shorting expedition. Asset managers and other investors have not significantly increased their short positions, possibly because some heavyweight institutions like MicroStrategy and Square have boarded the bitcoin train, while reputable banks like JP Morgan think it could ride as high as $146 000 in the long term. The global head of CitiFXTechnicals says a move to $318 000 by December 2021 is possible based on a study of the charts.

Betting against that kind of institutional heft could land you in trouble.

The following chart shows the volume of CME futures long bitcoin (in other words, expecting a price rise). Hedge funds are again the biggest players, but only to the tune of about $600 million, versus the $1.4 billion betting on a drop in price. But what’s more interesting about the chart below are the number of asset managers and other investors going long bitcoin. In this case, the hedge funds are not drastically out of line with sentiment among other groups of investors.

Source: Chicago Mercantile Exchange

While the Reddit traders taking hedge funds to the shredder over GameStop saw this as a blow against the evil Wall Street empire, bitcoin is already seen as a cradle of rebellion.

The early adopters backed bitcoin because they saw that governments and their boomer parents had trashed the financial system and bitcoin was a way of fixing the problem. There will only ever be 21 million bitcoin issued, unlike fiat currencies such as the US dollar which are being fire-hosed into circulation – apparently without limit.

Read:Is bitcoin the new gold?Goldman Sachs’s Rahmani strikes warning over bitcoin value

Technically, bitcoin is at a crossroads and needs to break above $38 000 to continue its bullish trend, according to this analysis. A failure to maintain price levels above $34 000 could push it into a bear trend, with support at $19 000. Over the medium and longer term, however, the outlook for bitcoin remains positive, so betting on a long and sustained drop in price could be disastrous.

And, as the GameStop saga has demonstrated, there is a motivated army of amateur investors willing to take on hedge funds and beat them at their own game.

Ciaran Ryan

The Writer's Room is a curated by Ciaran Ryan, who has written on South African affairs for Sunday Times, Mail & Guardian, Financial Mail, Finweek, Noseweek, The Daily Telegraph, Forbes, USA Today, Acts Online and Lewrockwell.com, among others. In between he manages a gold mining operation in Ghana, and previously worked in Congo. Most of his time is spent in the lovely city of Joburg.