Cryptocurrencies rose on Friday after a strong selloff a day earlier that saw an estimated $150 billion wiped out of the market after Russia invaded Ukraine.
Bitcoin was last up 1.6% at $39,065.00, according to Coin Metrics. Earlier in the day, the cryptocurrency jumped 11% in the past 24 hours, after dropping to $34,338.57 on Thursday. Ether rose 2.1% to $2,709.22.
Thursday’s selloff was triggered by Russia’s invasion of Ukraine, which also sent global stocks down sharply. For several months, bitcoin has been correlated with other risky assets like stocks, as more institutional investors get involved and short-term investors who trade bitcoin like other risky stocks have entered the market.
The sharp decline served as a reminder that “in a crisis, all correlations go to 1,” Noelle Acheson, head of market intelligence at Genesis, told CNBC, adding that it reinforced bitcoin’s risky asset characteristics. Meanwhile, the rebound shows longer-term investors were ‘waiting in the wings to buy the dip’ and risk traders are now betting things ‘won’t be as bad as they thought on day one’ , she said.
“In the markets, we’ve known for some time that a big move was coming – this usually happens after periods of consolidation, and activity in the options market also indicated this – but we weren’t sure in which direction. “, says Acheson. “Now we know: both.”
The 60-day correlation between bitcoin and the S&P 500 hit an all-time high on Wednesday, according to Acheson.
“The correlation was above 0.5 on two other occasions, and each time returned to lower levels,” she added. “We are likely to see the same again, as venture investors cede ground on price fixing to longer-term investors who see bitcoin as an insurance asset in times of geopolitical uncertainty, turmoil currencies and inflation. What we don’t know is when that will happen.”
A stunning intraday reversal in US stocks on Thursday and throughout Friday’s trading session led major indices to close higher. This positive price movement trickled down to cryptocurrencies.
A big short squeeze
The cryptocurrency rebound is also largely the result of a so-called short squeeze.
As of Thursday, around 73% of bitcoin futures traders were holding short positions, according to data from Glassnode. Since then, more than $180 million in liquidations have taken place and sentiment has turned bullish, Valkyrie Funds CEO Leah Wald told CNBC. The options were due to expire on Friday.
“Given the situation unfolding in Ukraine, market participants have generally moved into bitcoin to hedge against downside risks. It was basically defensive positioning,” said Vijay Ayyar, Vice President of business and international development at Crypto Exchange Luno. “What we are seeing now is market unwinding and short positions closing.”
When investors sell short, they are essentially betting on the falling price of the cryptocurrency. Traders can short bitcoin by buying a futures contract that bets on a cryptocurrency price lower than where it is trading when they buy that contract. These usually have an expiration date when they are sold.
A trader betting that the price of bitcoin will fall would sell a contract in the hope that it will fall so that he can buy it back at a lower price and pocket the difference. If the price of the contract rises and a trader closes his position, he must then repurchase that contract at a higher price.
This can drive up the price of bitcoin, resulting in a short squeeze.
“This momentum appears to have legs and should continue at least through the weekend barring another dramatic downturn in Ukraine or another black swan event,” Wald said.