Bitcoin Crash: A DeFi version of An Inverse Short Squeeze? A UTXO analysis and Spent Output analysis suggests whale Intent to cause liquidations and cheaper Bitcoin 😩

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(Edited)

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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

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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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No, a short squeeze will be what causes the market to go parabolic. You've got your terminology wrong. Short squeezes are when traders are "short" the asset (they've sold more than they own) and the price goes up, forcing them to buy back what they're "short" at higher prices. This can cause serious upwards pressure on the asset and if the market recognizes it, the "sellers" will dry up and the "shorts" will be forced to buy back what they owe at higher and higher prices.

You're on the right track, but, like I said, you have the terminology wrong. What the exchanges have done recently is hammer the long-leveraged traders by dumping the price. There are exchanges that allow people to buy anywhere from 2 to 100 times the amount of bitcoin they've actually paid for. In other words, you could send $1000 to the account and buy $100,000 worth of bitcoin. Using easy numbers, let's say bitcoin was at $33,333 and you sent in $1000 and bought it at 100x leverage. That means you would "control" 3 full Bitcoin. If the price goes straight to $36,333, for example, you would make $3000 X 3 BTC = $9000 in profits. If, however, the price goes down to $33,000, you would lose $333 X 3 Bitcoin = $999 and the exchange would immediately sell the 3 BTC you were controlling and take your $1000. This would obviously cause selling pressure on the market and possibly trigger further "liquidations" of long-leveraged positions causing a snowball effect and quite possibly a severe drop/"correction".

In my opinion, that's what's happened over the last month. The long leveraged positions got too out of whack and the exchanges hammered the price causing most of those leveraged positions to be liquidated. This, in turn, created even more selling pressure on the market and bitcoin tumbled. At a certain point, the traders will turn bearish and there will then probably be more "short" positions open than long. That is when I think you'll see the next jump in Bitcoin. That could then cause an actual "short squeeze" which would cause the price to shoot up as fast as (or even faster) than it recently dropped.

You have to remember, the exchanges are the "house" in a casino analogy. And what does the house always do? Win. The only way to beat the house long-term in the markets is to be a HODLer. If you trade, eventually you either get rekt, or you miss out on the giant moves. I'm sure there are success stories out there but they are few and far between.

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I want to ask this, which trend do you think BTCUSD will take, Bullish or bearish?

Though I'm seeing correction and retracement happening in the market, what do you think will happen after retracement?

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(Edited)

Hi @dagger212

Thank you for the detailed comment, I understand and agree your points.

Additionally thank you for the clear explanation of the position and vulnerabilities of the Highly Leveraged Bitcoin Traders, who are buying on Margin with borrowed funds.

My apologies in that I didn't explain clearly my intent.
I have a good understanding of the concept of Shorting, and I understand the import differences between what the Highly leveraged Bitcoin Traders are doing and what the Stock market shorts were doing with Gamestop.

I think my failure was to clearly explain was my conceptual parallel between the highly leveraged position of each, and the sensitivity to price and thus their vulnerability.

So my post was really a metaphoric comparison. And my use of the Term Bitcoin Short Squeeze was a combination of metaphor and neologism, in that I was using that term Short Squeeze, the trading concept it represents, and the new aspects of the cryptocurrency market called DeFi and both the opportunities that Lending provides and the vulnerabilities which accompany it.

This is incredibly fun, because we are literally in new territory using old ideas in new ways.

Thank you,
@shortsegments

P.S.
I would love to think of a name for this, what would you suggest?

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While all these reasons play a factor to a certain degree I am still confident in Bitcoins anti-fragility people just have not come to terms with it yet

Base case remains the same, there is no other system with a hard capped monetary policy and people gravitate to the hardest money over time

People are laughing at those staking 0.01 BTC and the like not realising their token is priced in dollars is going down even if the price of the token is going up

As the satoshi continues to increase in relative purchasing power it will expose these fiat currencies as well as these tokens and a lot of these business models will be obliterated

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I love that phrase Anti-fragility
I remember the first time I heard Pomp say it in one of his Bitcoin lectures.

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