Cryptocurrencies jumped on Friday following a steep sell-off a day earlier that saw around $150 billion wiped off the market after Russia invaded Ukraine.
Bitcoin’s price move has more recently correlated closely with other risk assets like stocks, as more institutional investors get involved and short-term investors who trade bitcoin like other risk equities have entered the market.
“Given, the situation unfolding in Ukraine, market participants generally went short BTC [bitcoin] to protect downside risks. This was defensive positioning essentially,” Ayyar said
Traders can short bitcoin by buying a futures contract that bet on a lower price of the cryptocurrency than where it is trading when they purchase that contract.
These usually have an expiry date at which they’re sold.
Also, cryptocurrency exchanges offer traders products that allow them to buy bitcoin via contracts that don’t have an expiry date. These are called perpetual contracts.
A trader betting that the price of bitcoin will go lower would sell a contract with the hope that it drops so they can buy it back at a lower price and pocket the difference.
If the price of the contract goes higher and a trade closes out their position, then they have to buy that contract back at a higher price.
That can push the bitcoin price higher, resulting in a short squeeze.
That trader may also borrow so they don’t have to put in 100% of the money that the contract is worth.
But they need to constantly fund the position to keep it open with a minimum amount of money.
When that minimum amount cannot be funded, an exchange may close that position. Or traders may close their short positions themselves.