Bitcoin prices rise on a short squeeze

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The little pressure has finally arrived.

Late Sunday night, the price of bitcoin started to climb and exploded higher, reaching $ 40,000 on some exchanges and reaching an incredible $ 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 have taken place in the bitcoin derivatives market since May. Specifically, the increasing prevalence of derivatives with stable margins. To quickly recap some of the highlights from Friday’s report, there are two types of derivative contracts (broadly defined): those that use stablecoins as margin and those that use crypto, or in this case specifically, bitcoin as collateral. .

It is beneficial to use stablecoins to lengthen bitcoin instead of bitcoin itself, because if bitcoin goes down while you are in the long run, not only does your position take a hit, but the value of the collateral you use decreases in tandem. That’s a big reason the May 19 sale was so extreme.

In The Daily Dive # 024 A Dichotomy Emerges, we covered the divergence between the ongoing spot market build-up and the increasingly bearish sentiment and trading occurring via derivatives markets as funding was consistently negative for much of the past three months.

“Derivatives and futures traders are bearish. Bitcoin stackers and hodlers are bullish. An explosive dichotomy in the market begins to emerge.

Specifically, bearish bets on Binance using stablecoins as collateral have occurred in increasing numbers over the past three months.

Until May, traders increasingly used bitcoin as collateral for a long bitcoin. This can be seen in the chart below which shows the proportion of crypto / stablecoin margin futures.

This short press is the opposite. Traders were increasingly selling bitcoin using stablecoins as collateral (i.e. selling bitcoin through futures without having the underlying bitcoin).

Slowly but steadily, however, the build-up by the seated stackers eroded the free float supply, which eventually gave way to a short squeeze.

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