On-chain analyst and founder of Capriole Fund Charles Edwards explains the sequence of events that led to the massive short squeeze that triggered a 40% increase for Bitcoin in January.
He outlines these three events as follows: first, a catastrophic event such as that seen in November 2022 during the FTX implosion causes a long-side liquidation.
The January short squeeze was a mirror image of the 2021 China mining ban Bitcoin price bottom.— Charles Edwards (@caprioleio) February 2, 2023
1. A catastrophic event causes a long-side liquidation (2021 China, 2022 FTX).
2. A period of sideways builds up negative sentiment & short bias
3. Massive short squeeze pic.twitter.com/VKPMHYcqlU
This was followed by a period of sideways activity, which led to a build-up of excessive short-bias in the market, coupled with negative sentiment.
Then, lastly, a massive short squeeze and rally to the upside occurred as incremental buyers step into an illiquid sell-side order book.
The market leverage ratio, a Capriole measure for aggregate leverage and positioning on the market, also corroborates the similarity of events, as an almost identical pattern occurred in January 2023 to that of mid-2021.
In simple terms, the underlying reason for the rise in Bitcoin's price in January was that the market still expected lower prices due to the prevalent bearish market conditions in 2022.
The negative sentiment and build-up of short positions led to a "short squeeze," which refers to when excessive short selling pushed an asset's price higher.
Positive indications lining up for Bitcoin
At the time of publication, Bitcoin was up 2.61% at $23,862 after reaching intraday highs of $24,262. Cryptocurrencies recovered after Federal Reserve Chair Jerome Powell noted there were indications of waning inflation.
Charles Edward, in an earlier tweet, stated that Bitcoin's OGs were acquiring the lead cryptocurrency at the fastest pace in eight years. "Bitcoin's ultra long-term holders (those that have held 5+ years) are accumulating exponentially in the last 6 months. These holders almost never sell," he added.