Short squeeze takes Bitcoin 40% higher to $40k in a week; Could China’s tech crackdown be a bigger cause and future bullish catalyst than most think?
As a personal note, this will be my last crypto weekly with Fundstrat. It’s been great working with Tom and team, and I’ve learned a lot from Fundstrat over the past nearly two years while here. For those wondering, I’m transitioning to Grayscale where I’ll join the team as the Head of Research. For readers that would like to stay connected, feel free to follow me on Twitter (@David_Grid) or add me on Linkedin.
Bitcoin rallied nearly 40% this week to $40k after again holding $29k support
Last week was scary for some crypto investors as the price of Bitcoin again tested the ~$30k support level that many feared would break and take us down into the low $20k range. But after holding the key level yet again Bitcoin then rallied higher for eight days straight and is now sitting just above $40k and testing the high end of the range it’s been trading in since May. This past week has been an important reminder why HODLing can be key for crypto investors (see our past analysis on the rule of the ten best days).
Source: FSInsight, Bloomberg
Sharp move higher in the spot market triggered a wave of short liquidations and a chain of market reactions
On Sunday night, we had a sharp move higher in the spot market that triggered a wave of short liquidations that helped propel the price higher.
Source: FSInsight, Skew
We have been talking about the market having lower liquidity during the summer for a few weeks now and we think this helps explain the sharp price action we saw that triggered the short squeeze of nearly $1B in futures liquidations.
Spot short interest on the exchange Bitfinex, which had been rising ahead of price declines over recent months, dropped sharply on the move higher as traders were likely squeezed out of their positions.
Source: FSInsight, Tradingview
The Bitcoin perpetual swaps price on Binance even momentarily reached as high as $48k.
Source: FSInsight, Binance
Alt coin market saw interesting price action as well as market makers holding BTC and other crypto pairs rebalanced into the move. The chart below of BTC/XRP is one example but there are others. One other notable thing we’ve seen is a continued uptick in BTC dominance. We have been talking about how dominance has historically risen during past mid-cycle consolidation phases and during bear markets. With BTC dominance still rising while total market cap has been rising, it’s one sign that could point to this sell-off being a mid-cycle rotation and not a full-on bear market.
Source: FSInsight, Tradingview
Speculation of Amazon entering crypto, which was later denied, was viewed as the catalyst by many
News headlines surrounding the move discussed speculation that Amazon was planning to enter the crypto market. But the company later came out and denied the news, which caused the market to sell off momentary.
Source: FSInsight, Google
But could recent Chinese stock market turmoil be a bigger contributing factor than most think?
We think many investors may be tempted to think this move was purely structural related to the short squeeze and speculative related to the refuted Amazon headline. And the natural question that they may be asking is why are we still sitting above $40k if this move didn’t occur for fundamental reasons?
But what is the Bitcoin and crypto price action was more fundamental than most think and related to the tech crackdown happening in China? We think this may be an under-appreciated narrative that could have the potential to continue taking prices higher.
Source: FSInsight, Google
Bitcoin & Chinese equities trend together but diverged sharply in recent days
We find it interesting that the Hang Sang and Bitcoin which tend to trend together in the past have diverged so sharply during recent days. We think one interpretation could be that this risk-off in Chinese equities could mean BTC is set to reconverge lower, but these aren’t normal times for Chinese equity markets. The CCP is taking a great leap backwards in its approach towards capitalism and that likely spooked many western investors with money in the country.
Source: FSInsight, Bloomberg
Bitcoin spike may have been leading indicator for capital flight for investors looking for a rout to “get me out at any cost”
We think Bitcoin could have been trading as a proxy tool for investors looking for a hedge to “get them out at any cost”. In the chart below, we have inverted the Hang Sang Index (up means price declines) to show how BTC traded higher ahead of the market open as investors were likely expecting the declines that occurred.
Source: FSInsight, Bloomberg
Cyprus bank deposit confiscation sparked the 2013 bull market. Could China tech sector crack downs cause concerns over property rights?
What could this mean for crypto going forward?
We think the CCP’s increasingly aggressive stance towards outside investors and its tech elites, if it continues or becomes more amplified, could be a catalyst for crypto.
If the wealthy in China become concerned that property rights may be at a greater risk – could we see a similar situation to what happened in Cyprus in 2013?
For those that don’t recall, the country effectively confiscated bank deposits for nearly half the country.
Source: FSInsight, USA Today
That move from the tiny island was one key factor that sparked the massive bull run in crypto, which was much smaller at the time, that occurred during 2013 where the price rallied to north of $1,000.
Source: FSInsight, Bloomberg
India demonetization in 2016 helped spark the 2017 bull market. Could China CBDCs have a similar effect?
Cyprus is not the only example of this type of event. Many also forget that preceding the 2017 bull, India had a demonetization of major bank notes in 2016 which contributed to sparking the crypto rally that followed.
Source: FSInsight, Wiki
As a personal story, during that time, there was a 30%+ premium for BTC in INR and I was arbitraging the difference by buying BTC in USD, sending it to Indian exchanges, holding it there since I couldn’t convert to the local currency without a domestic bank account there, and waiting for the premium to contract to collect the spread differential – fun times!
Source: FSInsight, Bloomberg
We often get asked if China introducing its own Central Bank Digital Currency would be a threat to Bitcoin and crypto.
But we think a full roll out of the Chinese CBDC could have the opposite effect instead and be a materially positive catalyst for crypto – just like the demonetization in India was – but this time with the world’s second largest economy.
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