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The short squeeze finally arrived.
Late Sunday evening, the bitcoin price started to run and absolutely exploded higher, touching $40,000 on certain exchanges and hitting an unbelievable $48,000 on the Binance Perpetual Swap BTC/USDT contract.
What was the reason for the move, and why was it so explosive?
Let’s break it down.
The first thing to understand is how derivatives work and how certain types of derivatives can affect the market.
In last Friday’s edition of the Daily Dive, we covered the structural changes that had occurred in the bitcoin derivatives market since May. Specifically, the increasing prevalence of stablecoin margined derivatives. To quickly recap some of the important points from Friday’s report, there are two type of derivative contracts (broadly speaking): ones that use stablecoins as margin and ones that use crypto, or in this case specifically, bitcoin as collateral.
It is advantageous to use stablecoins to long bitcoin instead of bitcoin itself because if bitcoin draws down while you are leveraged long, not only does your position take a hit but the value of the collateral you are using falls in tandem. This is a large reason that the May 19 sell off was so extreme.
In The Daily Dive #024 A Dichotomy Emerges, we covered the divergence between the spot market accumulation taking place and the increasingly bearish sentiment and trading occurring via the derivatives markets, as funding was persistently negative for much of the past three months.
“Derivative and futures traders are bearish. Bitcoin stackers and hodlers are bullish. An explosive dichotomy in the market is beginning to emerge.”
Specifically, bearish bets occurring on Binance using stablecoins as collateral had been occurring in increasing numbers over the past three months.
Leading up to May, traders were increasingly using bitcoin as collateral to long bitcoin. This can be seen in the chart below which shows the proportion of crypto/stablecoin margined futures contracts.
This short squeeze is the opposite. Traders were increasingly shorting bitcoin using stablecoins as collateral (i.e. shorting bitcoin via futures without having the underlying bitcoin).
However, slowly but surely, accumulation by sat stackers ate away at the free float supply, which eventually gave way to a short squeeze.
The beneath is a current version of the Deep Dive, Bitcoin Journal‘s premium markets publication. To be among the many first to obtain these insights and different on-chain bitcoin market evaluation straight to your inbox, subscribe now.
The brief squeeze lastly arrived.
Late Sunday night, the bitcoin value began to run and completely exploded greater, touching $40,000 on sure exchanges and hitting an unbelievable $48,000 on the Binance Perpetual Swap BTC/USDT contract.
What was responsible for the transfer, and why was it so explosive?
Let’s break it down.
The very first thing to grasp is how derivatives work and the way sure forms of derivatives can have an effect on the market.
In final Friday’s version of the Day by day Dive, we coated the structural modifications that had occurred within the bitcoin derivatives market since Might. Particularly, the growing prevalence of stablecoin margined derivatives. To shortly recap among the essential factors from Friday’s report, there are two sort of spinoff contracts (broadly talking): ones that use stablecoins as margin and ones that use crypto, or on this case particularly, bitcoin as collateral.
It’s advantageous to make use of stablecoins to lengthy bitcoin as an alternative of bitcoin itself as a result of if bitcoin attracts down when you are leveraged lengthy, not solely does your place take a success however the worth of the collateral you might be utilizing falls in tandem. This can be a giant purpose that the Might 19 unload was so excessive.
In The Day by day Dive #024 A Dichotomy Emerges, we coated the divergence between the spot market accumulation happening and the more and more bearish sentiment and buying and selling occurring through the derivatives markets, as funding was persistently unfavorable for a lot of the previous three months.
“Spinoff and futures merchants are bearish. Bitcoin stackers and hodlers are bullish. An explosive dichotomy available in the market is starting to emerge.”
Particularly, bearish bets occurring on Binance utilizing stablecoins as collateral had been occurring in growing numbers over the previous three months.
Main as much as Might, merchants had been more and more utilizing bitcoin as collateral to lengthy bitcoin. This may be seen within the chart beneath which reveals the proportion of crypto/stablecoin margined futures contracts.
This brief squeeze is the alternative. Merchants had been more and more shorting bitcoin utilizing stablecoins as collateral (i.e. shorting bitcoin through futures with out having the underlying bitcoin).
Nonetheless, slowly however absolutely, accumulation by sat stackers ate away on the free float provide, which ultimately gave technique to a brief squeeze.