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Troubles for Bitcoin as Hedge Funds Bet Against Stock Market Winners

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Bitcoin faces the prospects of undergoing broader downside corrections as hedge funds rush to short stocks that surged impressively during the coronavirus pandemic.

According to the Financial Times, some fund managers have increased their bets against the shares linked to technology, home gym equipment, grocery retail, and healthcare. Tim Campbell of Singapore-based hedge fund Longlead Capital Partners, for instance, called these stocks “the COVID over-earners.”

The co-founder/chief investment officer noted that the current earnings trajectory of some pandemic winners appears unsustainable in the long-run. He predicted that they would return to the pre-coronavirus growth rate at some point.

Bitcoin and its positive correlation with the S&P 500, the Dow Jones, and the Nasdaq Composite during the pandemic. Source: DXY on TradingView.com

Analysts have already argued that estimating the actual value of stock market gainers seems complicated, especially amid an environment of ultra-low interest rates and massive central bank and government stimulus that have supported even the worst-looking stocks during the pandemic.

Andrew Sheets, the chief cross-asset strategist at Morgan Stanley, noted that technology – the year’s best performing sector – is at the forefront of facing the most significant declines. He told FT:

“If we’re successful in getting a vaccine and the market thinks 2021 looks more normal, investors may think ‘let me sell companies where it’s as good as it gets now and buy companies with more cyclical earnings’.”

Bitcoin

Bitcoin and the US stock market surged and corrected hand-in-hand amid the coronavirus pandemic.

Analysts noted that the Federal Reserve’s near-zero interest rates, coupled with its infinite bond-buying program, trimmed yields of the US government bonds. As a result, investors’ appetite for riskier assets increased, which led them to cryptocurrencies and equities.

Moreover, the US Congress’s decision to pass a $2 trillion stimulus aid stressed the US dollar. That further prompted investors to seek havens elsewhere, primarily benefiting Bitcoin. It rose by more than 200 percent during the greenback’s decline.

A potential drop across the US stock market risks putting Bitcoin on a similar downside trail. Long-term crypto investor Gordon Gekko called it a “second wave effect” – wherein investors dump their most profitable assets to offset losses elsewhere.

It has happened in March 2020.

When the stock market showed signs of plunging harder than usual, investors de-risked their portfolios by shorting the most profitable assets for cash. As a result, gold and Bitcoin – two of the best-performing assets before the crash – plunged alongside the S&P 500, the Dow Jones, and the Nasdaq Composite.

Silver Shining

Fund managers holding serious bets against the booming stock market also face the risk of losing their capital. It is because of the hopes that Congress would pass the second coronavirus relief bill by the November 3 US presidential election.

The package, which may fare between $1.6 trillion to $2.3 trillion, would reduce the appeal of holding cash further. As a result, investors would inject more money into the stock and commodity markets based on the so-called “There-Is-No-Alternative” factor.

Bitcoin could benefit from the sentiment, as well.





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Bitcoin

Bad call? Bitfinex bears closed a block of Bitcoin shorts before the drop below $32K

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Bitcoin price is still in a rut, trading near $33,000 and trapped in a downtrend that just seems to get worse with the passing of each day. As the price slumps, analysts have consulted with several technical and on-chain metrics to explain the price collapse, but none of these have picked up on the exact reason. 

One area of interest has been the sharp rise in short positions at Bitfinex in the past week. Traders are placing exaggerated importance on these Bitcoin (BTC) margin shorts as if they are predictors of the current market crash. Still, as Cointelegraph previously reported, analysts forget that Bitcoin margin longs are usually much larger.

On June 18, longs outnumbered Bitfinex shorts by at least 22,800 BTC, but 87% of the short positions were closed before June 22. Currently, margin longs are 43,850 BTC higher than the amount shorted.

While those shorts are usually savvy traders, it is unlikely that they knew in advance that Chinese banks would prevent their clients from engaging in activities involving crypto trading or mining.

More importantly, these bearish positions were built while MicroStrategy was buying $500 million in Bitcoin after a successful senior secured note private offer. To make things worse, Michael Saylor’s business intelligence firm announced the intention to raise another $1 billion by selling stocks to buy Bitcoin.

Let’s take a look at how these courageous shorts fared.

Bitfinex margin shorts (blue) vs. Bitcoin price in USD (orange). Source: TradingView

On June 6, shorts increased from 1,380 to 6,700 at an average price of $36,150. Three days later, another 12,180 shorts were added when Bitcoin was trading at $37,050. Lastly, between June 14 and 15, shorts increased 6,000 to a 25,000 peak while Bitcoin averaged $40,100.

By looking at the Bitcoin prices when those short position increases took place, it is reasonable to assume that the 23,500 contract increase (green circles) had an average price of $37,625.

Related: Traders search for bearish signals after Bitcoin futures enter backwardation

Traders closed positions before BTC crashed bel$32,000

These short positions were steadily closed over the past three days when Bitcoin was already trading below $37,000. However, 17,000 short contracts had already been closed by the time the price plunged below $33,500. Therefore, it is implausible that the average price was below $34,500.

No one would complain about gaining 8%, shorting the market to generate a $73 million profit. However, it is essential to note that on June 16, when Bitcoin reached $40,400, these shorts were underwater by $65 million.

This analysis shows how even highly professional traders can go deep underwater. There’s no way to know if this trade would have been profitable had the crackdown on China not aggravated Bitcoin price or if MicroStrategy managed to raise the $1 billion before the price drop.

If anyone still believes in market manipulation, at least there’s comfort in knowing that pro traders can face drastic losses as well. However, unlike us mortals, whales have deep pockets and patience to withhold even the most rigorous thunderstorms.

The views and opinions expressed here are solely those of the author and do not necessarily reflect the views of Cointelegraph. Every investment and trading move involves risk. You should conduct your own research when making a decision.