Foresight Ventures: How to profit from the altcoin short squeeze?

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1. What is a short squeeze?

Going short allows traders to profit from falling asset prices. This is a common way of hedging existing positions or bearish market moves. But short trading can sometimes involve high risks. First of all, when buying orders suddenly increase and a large number of short sellers are forced to close their positions and continue to buy assets, the short-term demand in the market far exceeds the circulation, and when the price is raised due to insufficient supply, it may trigger a short squeeze transaction. Secondly, when a manipulative group absorbs and concentrates the circulation plate, so that short sellers in the market have no other source to buy back chips except this group, it will also trigger a manipulative short squeeze.

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2. Several key indicators of short squeeze trading

1. Funding rate of the contract:A short squeeze occurs when short positions overwhelmingly outnumber long positions. The specific manifestation is that when the contract funding rate of a certain altcoin exceeds -0.1% (that is, the daily short interest rate is 0.3%, and the annualized interest rate exceeds 100%), it means that the short-term short-term sentiment is extreme, and it will accelerate if it exceeds -0.75%. rise. In the following discussion cases, extreme negative funding rates have been seen.

2. Contract positions:What's more, the more liquidity that is locked up, the more volatility a short squeeze can create. It is mainly reflected in two aspects. First, the closer the contract position is to the circulating market value, and the closer the contract trading volume is to 50% of the spot trading volume, the easier it is for a short squeeze to occur. Secondly, the contract position should increase by more than 50% in the short term, indicating that the main funds are entering the market. If the open interest drops, it means that the main funds are retreating, and it is necessary to take profits at this time.

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3. Analysis of several recent classic cases

1、LINA：Linear is a cross-chain compatible defi-like synthetic asset protocol, and its fundamentals are lackluster. At the end of May, the minted stablecoin LUSD began to be pledged, and the pledge ratio was as high as 22% of the circulation. The stablecoins LUSD and BUSD have a yield of up to 60% on the LP mining token LINA, attracting an estimated 10% ratio of hedged mining. The main force of the market buys 23% of the circulating supply. In this way, 22% of the pledge and 23% of the banker’s control, a total of about 50% of the LINA chips are locked. This is a very typical manipulative short squeeze, the dealer holds the spot manipulation contract.

We can observe that the contract funding rate of LINA has greatly exceeded -0.1% since May 28, and reached the highest funding rate of -2% on May 31 and June 3. The contract position has also increased sharply since May 28, with a position of 50 million US dollars, while the circulating market value at this time is only 70 million US dollars; the contract trading volume is 50 million US dollars, which is close to 50% of the spot trading volume of 90 million US dollars, which can easily lead to short positions To close a position where supply exceeds demand. Therefore, during the week from May 28 to June 3, the price of LINA currency quickly increased by 2-3 times.

2、ARPA：The ARPA network is a decentralized secure computing network and a private public chain in 2018. The construction of the random number generator has been completed recently, and the second phase of the test network test is carried out. The main network is expected to be launched soon. The market maker was newly replaced by DWF in April, and DWF has been on the market for other encryption projects many times in history.

We can observe that ARPA’s contract funding rate has greatly exceeded -0.1% since May 12. Although there have been twists and turns in the middle, the high rate has continued until May 16, and the extreme value was as high as -1%. More importantly, the contract position has risen sharply since May 12, and the open interest is 30 million US dollars, which is close to the circulating market value of 40 million US dollars. Contract volume was $30 million, nearly 50% of the spot volume of $70 million. As a result, the ARPA short-squeeze market quickly rose 3-4 times within two weeks.

3、MTL：Metal is an encrypted asset payment platform with user incentives. It is an old project in 2017. The main players in the market control about 10% of the circulating market, and the trading volume on the Korean exchange Upbit has been exaggerated recently.

We can observe that MTL's contract funding rate was abnormal on May 6, but the short squeeze ended one day too soon. Then there was an abnormality again on June 6, and it reached an extreme value of -1.8% in the later period. More importantly, since June 6, the contract open interest has risen sharply, and the open interest is 60 million US dollars, which is very close to the circulating market value of 80 million US dollars. Contract volume was $80 million, nearly 50% of the spot volume of $160 million. This short squeeze saw MTL go up 2-3 times within a week.

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There are pros and cons to every coin, and there is a certain degree of uncertainty in short squeeze trading.

There are pros and cons to every coin, and there is a certain degree of uncertainty in short squeeze trading.

1. Encrypted exchanges will temporarily modify the rules.If the default position limit increases, it is bullish; if the default position limit decreases, it is negative. For example, Binance Exchange temporarily adjusted LINAUSDT leverage and margin tiers on June 3, and temporarily adjusted MTLUSDT leverage and margin tiers on June 7. This is a strong warning signal that "we have to change the rules at any time", meaning Don't let us exchange the pot just because you make money.

2. Subsequent value return of altcoins.While there have been plenty of altcoins that have moved higher after the short squeeze, it is more often that these heavily shorted altcoins continue to fall as prices soar. There is a commonly used peaking indicator, which is the comparison between the trading volume of the altcoin spot (or contract) and the trading volume of the altcoin king ETH. From historical data, once the trading volume of altcoin spot (or contract) exceeds or approaches ETH, there is a high probability that it will be the top of short-term sentiment. And the 4-hour amplitude of more than 20% also needs to take profit. In general, short squeezes favor technical patterns over fundamental events, which tend to lead to losses for some retail investors.

Disclaimer: All Foresight Ventures articles are not intended as investment advice. Investment is risky, please assess your personal risk tolerance and make investment decisions prudently.

Foresight Ventures bets on the innovation of cryptocurrency in the next few decades. It manages multiple funds: VC fund, secondary active management fund, multi-strategy FOF, special purpose S fund "Foresight Secondary Fund l", with a total asset management scale of more than 4 One hundred million U.S. dollars. Foresight Ventures adheres to the concept of "Unique, Independent, Aggressive, Long-term" and provides extensive support for projects through strong ecological forces. Its team comes from senior personnel from top financial and technology companies including Sequoia China, CICC, Google, Bitmain, etc.

Website: https://www.foresightventures.com

Disclaimer: All Foresight Ventures articles are not intended as investment advice. Investment is risky, please assess your personal risk tolerance and make investment decisions prudently.