Short squeeze on the bitcoin futures market early this morning.
It was a classic bear trap. Short positions had been increasing on all the major exchanges for the last few weeks. The “whales, ” i.e. the big traders of bitcoin, saw an opportunity and pounced
I wrote about this phenomena last November in an article called “Explaining the Insane Volatility of Bitcoin” Apologies for quoting myself:
“A key strategy of futures trading is trying to screw the other guy out of his money. If you see a big short position, and if you have enough juice to move the market, you go long to force the other guy to liquidate.
When faced with a margin call, the short guy has is forced to buy on the open market to cover his short, thus driving the price up even more. Then you close your position at a profit.
It can work the other way too. If you see a heavy leveraged long position, you sell to force the price down and thus the longs have to liquidate their position.”
There is nothing new under the sun. The short position on Bitfinex was higher than it was in December, when Bitcoin was approaching $20,000 USD.
There are still way too many people trading bitcoin (and other digital coins) with their hearts instead of their heads. Some people believe it will to a million dollars and others believe it will go to zero.
But the price of bitcoin goes where the big traders want it to go to. It is the most liquid medium of exchange ever created in the history of finance.
And it has a tiny market cap, easily manipulated. Yes, that’s what I said. The entire market cap of bitcoin and all digital currencies is $300 billion. Check out the market caps of publicly traded companies around the world:
- Market cap of all publicly-traded companies in the world:$64 Trillion
- Market cap of Publicly-traded companies in US: $27.3 Trillion
- Let’s go smaller, how about Germany: $1.7 Trillion
- Wait even smaller: Argentina which clocks in at $63 billion
Conclusion: Hedge Your Bets
Last week I sold some digital coins for fiat money. And I bought some puts on Riot Blockchains. Both those trades have cost me money. Am I complaining? No.
I own a lot of shares in cryptocurrency companies on the Toronto Stock Exchanges (TSX) and they have had monster rallies today.
Hive Blockchain (HIVE, TSXv) up 14%. Neptune DASH (DASH, TSXv) up 30%. DMG Blockchain Solutions (DMGI, TSXv) up 22%.
Hedging has allowed me to sleep at night and tonight I will sleep very well.