A bitcoin long squeeze
In the last few months there's been a lot of short squeezes going on, perhaps the most widely publicized one is Tesla (NASDAQ: TSLA). Tesla has been on a rise of epic proportions lately. Not even the company CEO, Elon Musk, can seem to slow the stock bubble. He tweeted that he thinks the stock is overpriced but this had little effect other than perhaps annoying the SEC again. At the time of that Tweet on 2nd May 2020 Tesla stocks were at around $760 and they fell 9% in a hurry. But that drop didn't last for long and since then Tesla stock has continued to rally massively:
The highlighted time here is when Musk tweeted the stock was overpriced and 3 months later the stock is almost double the price it was when he made that tweet.
Given just how terrible world events have been lately a lot of people, especially retail investors, have betting fairly heavily on certain stocks going down. Despite these expectations the equity markets have been going quite strong on the back of extreme liquidity being pumped in which has led to a number of short squeezes lately. When the people who have been going short see the stock prices go up their positions start to lose heavily and as a result the people shorting the stock end up contributing to the stock price increasing when they have to cover their positions. When the liquidity is lower the more this impact tends to be seen.
Something that's been very noticeable is the rise in the amount of leverage people are using in trades, this means that if the underlying goes too far against a trader their position can be liquidated as a result of a margin call. If this happens enough it tends to send the price in the opposite direction of those trades. So one of the perhaps less common things to happen lately, despite all the economic doom and gloom, is to see long squeezes. Perhaps the biggest example lately has been this amazingly large movement in price of Bitcoin which occurred on 2020 August 2nd:
Perhaps, like physical coins, Bitcoin to USD liquidity is lower than I estimated? 1 I can't help but wonder who's being "left holding the bag" in all these cases here.
Edit/Footnote from 2021: It's now 2021 and I'm starting to see who's holding the bag. I've now met traders who have been using large amounts of leverage to bet on price movements in cryptocurrencies without even the remotest understanding of the fundamentals of how the crypto market works. There's this common trade idea that's mostly based in ignorance where people think something along the lines of "this has to be a bubble that will crash, I'm going to go short" and then lever up or buy options. The huge volatility in crypto ends up causing people to get margin called and go broke even if over longer time spans they are right about the direction of their trade. Sometimes even your broker is selling your position data to firms to help you lose money (via Payment for Order Flow or other mechanisms), or there's substantial counterparty risk issues with the brokers as well like we saw in the GME fiasco in early 20212. Perhaps the biggest mistake people make is to not factor in currency debasement. If you are short in nominal terms using some fiat currency against some sort of scarce commodity supply then currency debasement can devastate your positions profitability even if the real value of the commodity drops. With talk of a Trillion dollars of stimulus here and there being thrown around with disturbing casualness it is clear that the purchasing power of many of the worlds major fiat currencies is declining. This is also pushing up equity prices.
It turns out that the BTC to USD liquidity is far lower than I realized due to the toxic impact of "stablecoins" like Tether distorting the market. What appears to have happened is that many people are really pricing BTC in terms of USDT (Tether) instead of real USD but under the entirely faulty assumption that 1 USDT = 1 USD. Many people in the retail crowd aren't even aware this is going on let alone what the implications of this are. Tether's own internal audits admitted that they didn't have enough reserves to back each coin but nobody seems to care, at least for now. In a market liquidity event this could prove to be a major factor. I've talked to a number of traders who are completely ignorant to the whole stablecoin impact, I guess this lack of understanding of important fundamentals might not be surprising if we are truly in a melt up. ↩
An enormous counterparty risk issue is starting to pop up in a lot of markets now, which somehow is not getting much attention. In particular the increase in rehypothecation of assets is creating huge amounts of counterparty risk even in assets that otherwise would appear to be safe. Also because so much debt is everywhere now if there's defaults on any sort of scale it could quickly become contagious to the system. ↩