Did we just see a DeFi version of a Inverse Short Squeeze?

This post is not about a classical Short Squeeze, but actually about something New in DeFi, or at least new to me. And I am using the term Short Squeeze as a conceptual point of reference.

So this post is comparing the concepts of a Short Squeeze to What may have just happened to Highly Leverage Traders of Bitcoin. Please read it with that in mind.

New information has come to my attention that you might find interesting.

Short Squeeze

During the GameStop Short Squeeze we learned that the stock options market is transparent, if you know where to look.

Highly leveraged open interest

In the Options Market, its call Open interest or OI. The OI on GameStop showed that there were thousands of Puts sold on GameStop, a option position dependent on the price going down to profit, and resulting in massive losses if the stock goes up.

Shorters

These people who sell these positions are called Shorters or Shorts. They are basically very leveraged investors who can get wrecked if the stock price moves against them.

In cryptocurrency lending creates highly leverage positions

In cryptocurrency traders deposit assets like Bitcoin, Ether/Ethereum in savings accounts called vaults and borrow against these deposited funds.

The traders are betting the price will go up. However if the price of Bitcoin falls below a certain amount, usually 40%. They are in danger of having the lending facility seize the Bitcoin in their vaults, and sell it to pay off the loans or margin these heavily leveraged traders have. This is called getting liquidated and is similar to getting wrecked. These people are in a Short position, but we don’t call them Shorters or Shorts, we call them highly leveraged traders.

March 2020 Bitcoin crash

In March 2020 we saw how a Bitcoin price crash of 40%, precipitated a huge number of liquidations as described above.

These liquidations produce sudden large volume sales, and these large sales create downward price pressure, price drops, price drop precipitated more liquidations and thus feeds on itself until all the high leveraged positions are liquidated and it stops.

It’s what my grandmother use to call a hot mess.

Bitcoin Short Squeeze

In cryptocurrency the markets there is something called UTXO Analysis, which allows the blockchain analyst to see who is sending Bitcoin to market, as in from which by wallets, and they can see how much Bitcoin is in the wallets.

There is also something called Spent Output Analysis which allows blockchain analysts and investors, to see or discover hugely leverage positions, in the lending facilities. This is not unlike open interest in the options market.

Subsequently using the UTXO Analysis a certain author wrote that a bunch of Bitcoin Whales sent Bitcoin to exchanges and sold it at progressively lower prices and forced the price lower and lower. An organized effort to lower the Bitcoin price and forced heavily leveraged traders into automatic liquidations of their highly leveraged Bitcoin loans.

This active “shorting” of Bitcoin appears to be a direct attempt to “wreck” highly leveraged Bitcoin holders, and allow whales to buy up their Bitcoin.

This is amazing, and combine it with the Elon Musk statements about Bitcoin mining harming the environment, the usual China FUD about banning Bitcoin, rumors of taxation, a normal expected Bitcoin correction after the run up to 67k, and you have a perfect storm.

Bitcoin, cryptocurrency, short squeeze, FUD and FOMO... a news writers dream, and never a dull moment.

Let me know what you think about this Short Squeeze idea and what you think caused the crash, in the comments below?

A short squeeze? A Elon Musk Twitter Bomb? China banning Bitcoin FUD? USA taxing Bitcoin before its sale, so called unrealized gain taxes?

@shortsegments

Shortsegments is a writer focused on cryptocurrency, the blockchain, non-fungible digital tokens or NFTs, and decentralized finance.

Read more of shortsegments articles here: https://leofinance.io/@shortsegments

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