Short Squeeze In Crypto

Crypto has just gone vertical and as I type it’s falling vertically back… with a bounce as I edit.

What is going on?

There are four possibilities.

1. We have seen the crypto bottom.
2. Something wicked this way comes.
3. Short squeeze.
4. U.S. debt ceiling.

Let’s look at each.

1. The Bottom

With DCG and Gemini in a mess and under the spotlight with 600,000 bitcoinBTC
in the frame at Greyscale and billions of who owes who and how much still unresolved, connecting two of the top ten U.S. crypto players, with the regulators baying at their heels, how can this be the bottom? The counter argument is classic: it is already in the price.

2. Something wicked this way comes

For me the previous second peak of the bitcoin double top was caused by Afghanistan and the U.S. pull-out to get ready for the Ukrainian invasion. So many corrupt officials heading for the airport with sacks of money was the key to that spike because bitcoin is perfect flight capital. One minister left $5 million on the tarmac and you can imagine he was cursing himself for that not being in bitcoin. Without that emergency, the top of that bubble would have been $40,000 and the following crash would have brought us back to where we were as of last week, $15,000-ish without a detour to $60,000.

So a sudden rush higher could be such a geopolitical emergency. A big Russian push in Ukraine, a regime change in Russia, a big escalation with Russia or much worse a Chinese invasion of Taiwan. There is always North Korea to make a mess, too.

Let’s hope that’s not it and if you check U.S. military contractors, they aren’t through the roof.

3. Short squeeze

An exchange that gets up to the sort of thing that sunk FTX or that “bucket shops” will often play is to short the customers’ positions on the basis they will fall and they will make profit on the drop. Imagine a crypto exchange that has sold its depositors’ crypto into stablecoin, a big short. As the market drops they make huge gains on the fall in value. Now say the regulator starts breathing down their neck. Then they might frantically try and cover that short and appear to hold the depositors’ crypto in the crypto the customers thought they had. That is going to create a mighty short squeeze. This is my favorite explanation right now.

4. The U.S. debt ceiling cometh.

Apparently, the U.S. Treasury think the mandatory government debt ceiling is going to be reached in days and it has laid in lots of funky mechanisms to stop the U.S. defaulting. Those money stashes, which are huge, may last until June before the government is out of money to pay the bills. Interestingly the Fed stopped tightening before Christmas and at the same time lots of cash flushed into the “reverse repo” system at the Fed, suggesting there was a flow of money into the economy about then also for no apparent reason. For all we know this has continued into the new year. Could this be liquidity going into the system for the U.S. Treasury to use in case the debt ceiling vote turns into a complete shambles, like the last time? The recent election of the new speaker turned into a farce worthy of South America, so raising the debt ceiling might also be a disaster, so best get the liquidity into the system now.

When money flushes the system up goes assets, especially stocks and the bubbly frothy asset class: bitcoin and hence everything else in crypto. This is also a good speculation for what is spiking crypto and the markets.

Could the market foresee the return of happy days instead? It’s not impossible but it seems unlikely. If it’s 3 or 4 this will be short lived. If it’s 2 or especially 1 it’s up, up and away.

Meanwhile I’m not playing on these train tracks and took this as an opportunity to tidy up some loose crypto and turn it into stablecoin.