Short squeeze in crypto

Crypto just went vertical and as I type it vertically falls back… with a bounce as I edit.

What’s up?

There are four possibilities.

1. We have seen the crypto bottom.
2. Something evil this way is coming.
3. Short hug.
4. US 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 framework of Greyscale and billions of who owes whom and how much still unresolved, two of the top ten US crypto players are connecting with the regulators on their heels, how can this be the bottom? The counterargument is classic: it’s already in the price.

2. Something evil in this way comes

For me, the previous second top of the bitcoin double top was caused by Afghanistan and the US withdrawal to prepare for the Ukrainian invasion. So many corrupt officials heading to the airport with bags of money was the key to that spike because bitcoin is perfect flight capital. A minister left $5 million on the pavement and you can imagine he was cursing himself for 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 last week, $15,000-ish without a detour to $60,000.

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

Let’s hope it’s not, and if you check US military contractors, they’re not through the roof.

3. Short squeeze

An exchange that comes up to the type of thing that dropped FTX or that “bucket shops” will often play is to short the customers’ positions on the basis that they will fall and they will make money on the fall. Imagine a crypto exchange that has sold depositors’ crypto to stablecoin, a big short. When the market falls, they get big gains from the drop in value. Now say the regulator starts breathing down their necks. Then they can frantically try to cover the short and appear to keep the depositors’ crypto in the crypto the customers thought they had. It’s going to create a mighty short squeeze. This is my favorite explanation right now.

4. The US debt ceiling is coming.

Apparently, the US Treasury Department believes that the mandatory debt ceiling is going to be reached in days, and it has put in a lot of funky mechanisms to stop US defaults. These cash reserves, which are huge, could last until June before the government runs out of money to pay its bills. Interestingly, the Fed stopped tightening before Christmas and at the same time lots of cash flowed into the “reverse repo” system at the Fed, suggesting that there was an influx of money into the economy then too for no apparent reason. For all we know, this has continued into the new year. Could this be liquidity going into the system that the US Treasury can use in case the debt ceiling vote turns into a mess, like last time? The recent election of the new speaker turned into a farce worthy of South America, so raising the debt ceiling could also be a disaster, so it’s best to get the liquidity into the system now.

When money flushes the system, so do assets, especially stocks and the exuberant frothy asset class: bitcoin and hence everything else in crypto. This is also a good speculation for what boosts crypto and the markets.

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

In the meantime, I’m not playing on these train tracks and took this as an opportunity to clean up some loose crypto and turn it into stablecoin.