BTC — Still bearish, but likely to see a bounce in the short term (with 6/12 update at bottom)
· News flow in the space has been positive since our last 5/26 update, which makes the weak price action even more bearish. Still looking to retest $6K level before we find a bottom, but we think the next move will be up and this bounce should be used to sell
· Near term we are sitting on support and set up for a respectable short squeeze. BTC short interest has increased in June and now the ratio of short interest to recent trading volume is similar to what it was during the huge April 12th short squeeze that drove BTC price up $1,000
· The last major support levels to be tested are the $6,500 range and the $6,000 level, a breach of these will be UGLY!
· With certainty we can say, that we are 15 days closer to finding a bottom since our last 5/26 update, however, as you start to think about bottom fishing, please remember that a drop of 90% is a drop of 80% plus another drop of 50%! This is why you never try and catch a falling knife
After an ugly $1,0000 drop this weekend at least partially a result of a hacked South Korean exchange, at the time of writing we sit in the $6,700 range just above support. Amidst declining trading volumes and very low volatility, BTC was setting up for a big move for some time. The above chart is from the Bitfinex exchange, where you see we went from a high of trading 70K bitcoins per day down to the 20K range that we’re seeing today. The volume was declining even during the green candle up days in June, which is bearish. The yellow on the bottom is the rolling 20 day trading volume and the thick green line is a trend line I drew through it. Obviously, the dollar volume has decreased much more.
Besides this exchange hack noted above the crypto newsflow has been quite positive on balance. There is talk of ETHR addressing it’s scaling issues plus positive commentary out of regulatory organizations and governments. We are still waiting for the other shoe(s) to drop on the enforcement front, however it has been quiet in the near term and no 51% attacks to speak of.
I will leave the charting analysis to the Technical Analysis folks, but I do want to point out that we don’t have a lot of support levels left here as we are trading below all of the moving averages. Two areas have support in the $6,400–6,600 range from the early April 6 bottoms and also $6,000 from the Feb 5 bottom.
Let me explain why we think a short squeeze is coming. When I worked on Wall Street as a long short equity investor, we paid a lot of attention to investor positioning. Which investors owned a particular stock — long term investors vs fast money long only investors, or, the worst case scenario, a stock held mainly by short term hedge fund investors. To support the case for owning a stock, you wanted to see blue chip long term value investors, who are less likely to sell after a bad quarter is reported. It was also important who was short the stock. A high short position or short interest, or a spike in short interest in a stock is bullish for future price moves, because at some point those investors have to buy back their shares. If the short interest is high relative to trading volume, hedge funds buying back or covering their short positions can lead to large spike in the price. Being short a stock is more difficult and riskier than being long a stock, because most market players and management want the stock to go up and will play all kinds of games to artificially pump the stock up. For example, if a company reports a weak quarter, they can announce a new share buyback plan, or, if a companies’ growth rate is slowing they can always announce an acquisition that boosts and obfuscates y/y growth rates.
A short position also carries unlimited risk because a stock can drop to zero and you lose 100% of your capital, however it can go up 10x on the upside and you’ve lost 10x your capital. The vast majority of short investors are hedge funds, which can easily be convinced to cover some or part of their positions in low conviction short trades if they think there is positive news/data coming. When short interest is high, this can lead to huge price spikes. We recently saw a short squeeze in $TSLA after they announced that they would resolve their manufacturing bottleneck at their investor day and then the stock popped 10%.
In crypto, the source of short information is Bitfinex, an exchange where you can have a margin account and short currencies against fiat. Not all exchanges allow you to short cryptocurrencies, but we are comfortable that the trends we’re seeing in Bitfinex short interest applies broadly to the space as we can observe short squeeze price action across all exchanges. When short interest spikes up materially, usually on falling price levels, we are set up for a short squeeze.
Many of the large green candles (large up days) in 2017 were preceded by a spike in short interest. The April 12th $1000 spike up in BTC price was preceded by a large spike in short interest and very high absolute short interest levels of 40K Bitcoins which you can see on the Bitfinex chart above (orange and yellow bars are the short positions while red and green candles are price). However, as you can also see on the above chart on the far right 6/10 we are at much lower absolute short interest of 24K Bitcoins. Even though it’s a lower amount on an absolute basis the short interest increased in June and Bitcoin trading volume has been declining materially and this allows smaller volume of trades to move the market. The important metric that captures this is the ratio of short interest to trading volume, and this metric is very close to what it was during the April large short squeeze spike in BTC price. The set up for a squeeze isn’t as good today as it was April 12th however, as you can see from the chart, it is pretty good, plus we are sitting at support.
6/12/18 update: On the updated below chart of Bitfinex short interest again the yellow and orange bars are the number of Bitcoins shorted on BTC shorted while the red and green candles are BTC price. Again, you can see the trend in short interest running in the low 20,000 range going into the weekend $1000 drop. Then it spiked up into the 24K range post drop and has continued to increase yesterday into the 26K range. While, again, this is lower than the April 12th short interest peak in the 40K range the daily trading volume is also much lower and the ratio of short interest to daily volume is comparable to level that it was on April 12th. We’ve already seen a few smaller squeezes however I don’t think we’re done yet and I think we retest $7,000 and even get slightly above before we resume the downtrend and retest of $6,000. Please see our May 26th piece for how to spot the bottom.
