Bitcoin analysts call the top on $74,000 rally as ‘short squeeze’ fizzles out

Analysts are calling the top on Bitcoin’s rally.

The top cryptocurrency has jumped some 12% since the start of March despite heightened geopolitical tensions brought about by the US and Israel’s war with Iran.

Yet the rally appears to have been fuelled by short sellers getting caught out rather than a renewed interest from buyers, according to Nathan Batchelor, managing partner at crypto trading data platform Biyond.

“Bitcoin had a significant amount of short liquidations around $73,000 to $74,000 which appear to have been taken out, and could provide a potential reason why we have seen a sudden push towards this area,” he told DL News.

“Our volatility models are currently low, which would agree with the concept that we are seeing a stop-hunt, rather than the start of a meaningful price breakout towards $80,000.”

Short selling Bitcoin is an investment strategy designed to profit from a decline in the asset’s price. Investors borrow Bitcoin, sell it, and aim to buy it back later at a lower price, keeping the difference as profit.

If traders open shorts and the price of Bitcoin moves higher, they may be forced to close their trades by buying it back at higher prices, losing them money and fuelling a price rally.

Rate cuts delayed

Bitcoin’s rise comes as the US and Israel’s war with Iran rattles financial markets.

Iran’s blockade of the Strait of Hormuz, a vital shipping lane that oil produced in the Middle East must pass through, has caused the price of oil to soar as high as $119 a barrel in recent weeks.

Indeed, Iran has made the price of oil a key part of its strategy, warning the world that unless hostilities cease, then the price could hit as high as $200.

If prices stay above $90 a barrel for an extended period, it could trigger a 10% to 15% correction in the US stock market, JPMorgan analysts said on Friday.

Surging oil prices also spell trouble for Bitcoin.

“When energy becomes more expensive, inflation rises and central banks postpone rate cuts, which ultimately restricts the liquidity that Bitcoin needs to gain momentum,” Sebastián Serrano, the CEO of Argentinian crypto exchange Ripio, previously told DL News.

Previously, bettors on Polymarket gave an 85% chance of the US Federal Reserve cutting interest rates in July. But in the weeks since the US attacked Iran, those odds have dropped.

Polymarket bettors now view October and December as the most likely months for the next rate cut, giving a 68% and 78% chance of one occurring in those months respectively.

Similarly, the probability of the US central bank slashing interest rates in June has dropped from 78% on February 27, to just over 22%, according to the CME FedWatch tool.

“The oil-driven inflation spike has pushed Fed rate cut expectations from June out to October,” Ben Harvey, a researcher at crypto investment firm Keyrock, told DL News.

‘Not what you’d expect’

Yet since the war started, Bitcoin, broadly considered a risk asset like stocks, has risen.

“It’s not what you’d expect given the circumstances,” Laurens Fraussen, a research analyst at Kaiko, a crypto data firm, told DL News shortly after the war began.

According to Fraussen, the start of the war saw lots of traders attempting to short Bitcoin as it traded between $60,000 and $63,000, hoping that the situation would negatively impact the top cryptocurrency.

“The market bouncing as aggressively as it did can be seen as a short-term short squeeze before the market consolidates and chops in the lower $60,000 region,” he said.

It’s not the first time such a scenario has played out, either.

In 2022, Russia’s invasion of Ukraine also spurred a price rally as short sellers got caught out betting on the bearish news. Once those shorts were out of the market, Bitcoin continued to fall, however.

“The ingredients are there to create something similar here,” Fraussen said.

Tim Craig is DL News’ Edinburgh-based DeFi Correspondent. Reach out with tips at tim@dlnews.com.