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Bitfinex Bitcoin shorts abruptly plunge to historic lows


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Bitfinex shorts immediately dropped to their lowest point since early 2018. What does it mean?

Key points

  • A whale has closed a US$220 million short position on Bitfinex.
  • There are reasons to believe this could be good, or bad, for Bitcoin prices.
  • This means something.

The number of Bitfinex shorts abruptly plunged by almost 70% on the last day of June, nearly coinciding with Bitcoin's recent tumble from around $12,000 to its current foothold in the low $10,000 range.

Assuming it's not a case of butterfingers or an anomaly of Bitfinex's recent thoughts of 100x leverage, a line that sharp seems like the kind of thing that has to mean something.

The below chart shows the year to date. The candles are Bitcoin prices on Bitfinex, the green line shows the number of open long positions on Bitfinex, and the red line shows the number of open short positions on Bitfinex.

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BTC/USD chart by TradingView

As you can see, that plunging red line is momentous by just about any measure, equivalent to about $220 million of Bitcoin.

Opinion: What happened here?

It's not possible to say anything with certainty, but there are a number of guesses we can throw out there.

Based on the fact that it all happened instantly, the first conclusion we can reach is that this was probably the move of an individual whale rather than a team effort. This whale pulled an enormous pessimistic bet from the market.

Based on the lack of immediate and directly correlated price action at the time the shorts were closed, we can assume it didn't just run its course naturally. Instead, that whale specifically decided to cancel those shorts all at once. To do this, they probably "claimed" their position. This basically means paying it off and claiming your gains/losses to date.

Not coincidentally, someone deposited the right amount of Bitcoin on Bitfinex to claim that position, at exactly the right time to account for all of this.

That seems likely to be the trader we're looking for. Perhaps not unsurprisingly, the Bitcoin that funded this transaction is old. A quick look down the trail of one of those transactions shows it came from Bitcoin that's been sitting dormant since 2015.

So, it looks like what happened here is that a big money oldschool Bitcoin whale had an enormous opens short position on Bitfinex, and they closed it with an enormous amount of oldschool Bitcoin they had lying around.

Bullish or bearish?

At a glance, it would appear bullish. Someone with a lot of money withdrew an anti-Bitcoin bet worth hundreds of millions of dollars, which strongly suggests that they think prices will go up. If the markets are moderately manipulated, common wisdom points at a high likelihood of upwards price manipulation in the near future. In that context, it's as bullish as heck.

But if you go a step further, and assume even shonkier and more manipulated markets, it could be a sign of an upcoming deliberately engineered price drop, from colluding exchanges working to systematically depress prices for the purposes of liquidating long positions.

In that context, it could be more bearish.

Similarly, it's worth noting that they didn't switch from short to long, which would have been far more bullish. Rather, they just closed their position and bailed out entirely.

There's also the potential for a long squeeze, now that the longs so greatly outnumber the shorts. Essentially, what might happen is that prices start dropping in the now-net-long market, liquidating those long positions as they go. As they get liquidated, those positions sell off their Bitcoin collateral. The end result is that a price drop gets emphasised by an enormous wave of sell pressure.

The opposite can happen too. When a market is saturated with short positions they can rush prices higher, as has happened on occasion.

Precedent says that when shorts drop sharply though, the prices decline in the following days. In the bigger picture of things, it's well worth noting that Bitfinex shorts are now sitting at a semi-historical low, at levels not seen since right after the big bubble burst at the start of 2018.

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BTC/USD chart by TradingView

In the bigger picture of prices, you can see that this might be kind of a big deal, and it may be worth considering the impacts this can have on the overall market. The accepted consensus is that short selling has a stabilising effect, so the withdrawal of this whale could prove interesting.

Of course, this is just Bitfinex, and it's just one margin trading venue among many. There's also BitMEX – because that's totally what first comes to mind when someone mentions "stabilising effects"– and other exchanges like Binance introducing their own margin trading systems.

The most mundane explanation for all of this might be that the whale simply decided to do their margin trading on Binance instead, and they're now making a migration. And on the equally mundane side of things, everything else aside, common wisdom can't help but point out that a whale closing a massive short position simply has an intrinsically bullish vibe.

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Disclosure: The author holds BNB, BTC at the time of writing.

Disclaimer: This information should not be interpreted as an endorsement of cryptocurrency or any specific provider, service or offering. It is not a recommendation to trade. Cryptocurrencies are speculative, complex and involve significant risks – they are highly volatile and sensitive to secondary activity. Performance is unpredictable and past performance is no guarantee of future performance. Consider your own circumstances, and obtain your own advice, before relying on this information. You should also verify the nature of any product or service (including its legal status and relevant regulatory requirements) and consult the relevant Regulators' websites before making any decision. Finder, or the author, may have holdings in the cryptocurrencies discussed.

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