Short sell positions on Bitfinex, the biggest USD to Bitcoin exchange in the world, are nearing record highs. As of 21 August 2018, there were 39,524 shorts on Bitfinex, just below the record of 40,719 shorts on 12 April. This could lead to a short squeeze and a rapid rise in Bitcoin’s price, which is what happened on 12 April when Bitcoin’s price rose USD 1,000.
Shorting Bitcoin means a trader is betting on Bitcoin’s price going down. This is the opposite of a long, which is when a trader holds Bitcoin and expects the price to go up. Shorts are accomplished via borrowing Bitcoins through an exchange and converting them to USD, then buying the same amount of Bitcoins for a cheaper price to pay back the loan when Bitcoin’s price relative to USD declines.
The massive amount of short orders on Bitfinex makes conditions prime for a short squeeze, especially since 16,000 of the short orders were opened below USD 6,700. This means if Bitcoin rises to USD 6,700 these short orders would likely have to close to avoid losses, and when shorts close that causes an increase in Bitcoin buying pressure to pay back the loans.
A short squeeze happens when the Bitcoin price rises, causing short positions to close and buy back Bitcoins. The buying pressure from covering short loans causes the Bitcoin price to rise even more, causing more shorts to close, and the Bitcoin price goes even higher. This is a positive feedback loop that can cause Bitcoin’s price to rise rapidly in a single day.
When CoinDesk originally documented the state of shorts on Bitfinex on 21 August, Bitcoin’s price was USD 6,435. As of this writing on 22 August Bitcoin’s price has risen to USD 6,700, after going from less than USD 6,500 to USD 6,900 all at once late on 21 August. This price movement could indeed be the result of a short squeeze on Bitfinex.
This rally could continue since Bitcoin is oversold according to the relative strength index (RSI), so this bump in prices from the possible short squeeze could lead to a bigger rally towards Bitcoin’s equilibrium price.
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