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ProShares ETF, Bitcoin, and The Short Squeeze

Priced-In or Net-Neutral, What's Next

ProShares ETF, a Net-Neutral Proposal

The ProShares ETF Proposal was several parts, the highlights were a BTC Long ETF and a BTC Short ETF. All else being equal, that’s net neutral news. If a BTC long ETF proposal was accepted by the SEC, that would influence Bitcoin to the upside. Conversely if a BTC short ETF Proposal was accepted, that would influence Bitcoin to the Downside.

The SEC accepting such a “rule change” or proposal, double edge sword dual proposal for this matter, the acceptance wouldn’t influence the price either to the upside or downside, neither should the SEC rejecting the proposal.

The market has developed a “herd mentality” following the overreaction from previous SEC Winklevoss ETF rejection, and the postponing of the VanEck Solid X ETF. The Herd has adopted a short ETF rejections news mentality. And the herd has done so ever so efficiently that Bitcoin Shorts are currently stacked close to all-time highs, while Bitcoin’s price remains in-tact.

Market Dynamics

Bitcoin’s price is currently hovering at $6403 after posting a high of $6896 a brief 24 hours ago. Yesterday’s $400 upwards move appeared to be the start of a short squeeze, during the leading derivatives and futures exchange Bitmex downtime. The upwards momentum was shunned and Bitcoin’s price was rejected back into the previous trading rage following several news articles. Tether printing, more China Fud, and the ProShares ETF rejection. Yet price is holding at previous range highs, and nowhere near previous lows. Which leads us to conclude that the net neutral ProShares ETF news had been priced in.

The above chart displays current Bitcoin, the result of the previous April 2018 Short Squeeze, highlighted within the green a 44% Gain in BTC price over a period of 30 days.

“Underwater Short:
A short seller that has sold short and is currently at a loss, looking to either dollar cost average, or for the shorted asset’s price to decline in order to cover with a minimal loss.”

Currently, and according to the above chart and our metrics there are some 11,000 Short Positions underwater. Most of which sold short around $6200, down to $5900, and through the current range with a top of $6400.
The “Herd Mentality” has become so apparent, the majority of the market is currently short, and underwater, expecting Bitcoin’s price to decline due to the Negative ETF News. Which was once again priced-in.

Anatomy of a Squeeze

“Short Squeeze:
A short squeeze is a rapid increase in the price of a stock that occurs when there is a lack of supply and an excess of demand for the stock. Short squeezes result when short sellers cover their positions on a stock, resulting in buying volume that drives the stock price up.”

Previous Squeeze:
The last instance our team signaled for a short squeeze was on 4/7. The result of that squeeze on BTC resulted in a market wide rally lasting 30 days 4/12/17 through 5/18/17.

Why Squeeze? 
On the chart below we plot BTCUSD, below is in red BTCUSDSHORTS, in green BTCUSDLONGS.
The red highlighted rectangle demonstrates the areas of interest. Where short sellers increase by the masses, yet demand remains strong and unwavering.
As BTCUSDSHORTS climb from 27,329 open short positions to 40,079 Bitcoin’s price refused to make a lower low, and maintained a trading range.

Understanding a Short Sale:
Suppose that Token A was borrowed on margin and that “Short Seller Billy” then sold 100 Tokens at $25. Several days later, Token A price plummets to $5 per share and Billy buys it back. In this case, Billy earns $2,000 [($25 x 100) — ($5 x 100)].
However, if the Token price increases, Billy is still liable for the price of the Token when he sells it. So, if Billy buys back the token at $30 instead of $5 as in the example above, he loses $5 per share. That $5 times 100 equals $500 that Billy has to pay up.

But what if Billy isn’t the only short seller who wants to buy back shares before they lose even more money as the token rises? He’ll have to wait his turn as he tries to buy-back, because others are also clamoring to get rid of their tokens, and there’s no limit to how high the token could climb. Therefore, there’s no limit to the price the short seller could pay to buy back the tokens.

This is where the short squeezer comes in and buys the tokens — while the panic-stricken short sellers are causing a further rise in price due to short-term demand. A short squeezer must not only learn to predict and identify short squeezes, but also pick the right time to sell the Tokens, which is at or near the peak.

At or Near the “Peak”:
Short selling near market peaks can be profitable especially when leveraged on margin. Short selling market lows is dangerous and reckless for the short-sellers. Yet can turn into a very profitable trade for longs.

Use the above chart for reference.
18,000 short positions where opened near Bitcoin’s latest price peak. As BTC entered the current trading range it did so with 25,000 Short positions. In this range short positions increased from 27,000 to 40,000. Currently BTC has 39,100 open short positions on Bitfinex.

It’s very much hard to estimate the number of current underwater shorts. Entering the range with 27,000 and peaking at 40,000 at one point it was safe to assume the 11,000 short positions where underwater. The closed short positions from 40,000 down to 39,100 could be positions opened near the peak, opened during the current trading range, of anywhere in between. Yet we estimate there are some at least 11,000 shorts currently underwater.

The statement that Short Interest is high, and Open Short Positions are near all time highs while BTC is in a trading range is undeniable.

What’s Next?

According to our analyst team, the history books, and previous Bitcoin cycles. We believe that the Short Squeeze is imminent. Yesterday’s upwards volatility in price action was just a teaser.
Our margin trading desk has had long positions since $6040, and is hedged short at $6500 with proper stops to capitalize on volatility in either direction. Yet we’re looking forward for a violent upwards move. As there are  currently more Bitcoin Shorts open, than there were Bitcoin longs open at $20,000USD, in December 2017.

 

Please visit our BlockDelta profile for our full contact details.

Author: George Saber

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