Everyone loves a short squeeze, except those unfortunate beings holding onto short positions. Such was the case over the past week, as Ethereum bottomed out at $80and then rushed to $140, a 66% rise, if you care to do the math. It has since pulled back to $134, but what is a few dollars in the volatile world of cryptocurrencies.
The quick rise of Ether did come as a surprise. Cryptocurrencies were cratering across the entire spectrum. Critics were proclaiming the demise of the digital coin revolution, and investors were learning why this space is often called the most volatile asset class in the history of financial markets. Suddenly, all coins were on the rise again. Bitcoin, the bellwether of the group and comprising a 53% market share of the capitalization value of all coins, had rebounded 30%, settling in at $4,168 in recent trading.
The conundrum is that Bitcoin and Ether are typically tied at the hip, so to speak. Each coin vacillates, but the correlation between the two never varies significantly. There are platform differences. The Ether platform is primarily more flexible and user-friendly for developers, the reason why the majority of Initial Coin Offerings start with Ether deposits and move on from there. If there is a major press release touting these benefits, then Ether can break away, but there was nothing in the press to suggest this type of condition.
One crypto analyst explained that, “Quite a substantial difference between the ETH and BTC structure. If you were betting on correlation remaining the same, and both reverting to structural equilibrium, $ETH seems to be the better play for shorts, and BTC for longs.” If this statement is true, then professional shorts could have loaded up on Ether to ride the car downhill for as long as it would go. Unfortunately, the market turned, catching these shorts flatfooted. When buy-side demand hits a cryptocurrency, it can be a fun thing to watch.
Bitcoin had finally found a bottom at $3,200. When it turned and continued to rise after five days of trading, every altcoin benefited. Bitcoin Cash, even after its much-ballyhooed “hard fork”, put on a show, climbing from $75 to $238. Yes, quick fortunes can be made in cryptocurrencies on paper. The “trick” is to close those profit positions without the issue of liquidity coming back to deflate prices.
Are cryptocurrencies back to stay? Have they found firm support levels? Since cryptos are so new, with very little in the way of long-term pricing history, conventional technical analysis tools have limited value in providing true insights on what might happen next. Fundamental forces at work in the background are also difficult to discern. For example, when equities were slammed a few months back, Bitcoin and its altcoin brethren maintained their values. Analysts wondered at the time if Bitcoin had become a “safe haven” for equity investors. Bitcoin already has the reputation of being a “safe haven” for other crypto tokens, but a link to the equity world was pure speculation at that point
The test of this theory may come soon enough. Another equity bloodbath has taken place in December. Have investors chosen Bitcoin and others as “safe havens” again? When equities rebounded after the last correction, capital flew away from cryptos. Will it happen again after this stock correction phase? Only time will tell.