Taking a Look at that Giant Green Candle From April 12th, 2018 and Its Implications
Bitcoin had some insane price action overnight. It went from $6.8k to $8k, then back to $7.6k – $7.7k as shorts (at a record high at the time) had to cover their positions.
When shorts “cover” their leveraged short positions (positions that are betting on Bitcoin going down), they have to buy Bitcoin at the current market price.
When many positions are closed in quick succession due to the price going up, it creates a cascade effect (where increasingly more positions are forced to or choose to close).
This can result in the price going up quickly (as shorts turn into buyers and combine with buyers already buying). This is called a “short squeeze” (you can tell from the giant red candle in BTC/USD Shorts and the giant green candle in BTC/USD that a short squeeze occurred in Bitcoin occurred last night).
Several things happened at once to produce a rally.
- there was a short squeeze,
- increased interest in buying,
- “stop buys” triggering (“stop buys” are orders set to buy if the price goes up)
- FOMO buying (people who see the price action and jump in)
- bots getting buy signals from the increases
- good old speculation, etc.
This rally was one such rally, in it actually resulted in $1.2 billion worth of Bitcoin being traded and a $1k price increase all in one hour!
This set of events is something that can be spurred on organically. For example, an unexpected event might cause many people to buy suddenly. However, this is generally done with tact by those with deep pockets who have an interest in seeing upward price movement (in this case, pockets so deep that $1.2 billion worth of Bitcoin was moved).
This doesn’t imply that there isn’t a real interest in Bitcoin. Indeed we can see that there is. It only implies that the $1k push at 4 am PST and 7 am EST with little relevant news out that day was not likely the primary catalyst here.
Likewise, this doesn’t mean one factor like “the short squeeze” should be used to explain this. In reality, many shorts closed after the initial price increase; so “short squeeze” alone only explains part of the picture. You can see this better with the BTC chart, shorts, and longs side by side; see it on a chart).
NOTE: If you want an additional “why.” We can say it was “An Islamic scholar has declared bitcoin permissible under Sharia Law” that could have triggered the short squeeze. I’m more in the “it was a short squeeze, not Sharia, camp,” but it makes sense both would have an affect.
Why this occurred aside, it has occurred and we should consider what the next step might be.
In general, this sort of rally can spur on momentum that can result in a sustained rally, or it can give in to sell pressure as people take their now rather large profits from buying at previous levels. The only way to know how this will play out is to sit back and watch.
We have seen a lot of quick sell-offs and a lot of downward movement over the past few months, so that should be kept in mind. Yet, we have also seen a few nice rallies spurred on by price action like this in those same months.
We can look to the rally from $7.3k to $8.9k in March that was started with a price movement like this, or we can look at a rally before that on March 11th which ended up right back where it started rather quickly before continuing on a downtrend.
Historically, speaking only of Bitcoin’s chart from 2018, there is a lot of precedent for this to go either way.
The truth is, any given rally attempt (regardless of how it starts off) could be the one that sets us on a new path. This one is no exception. However, it is still too early to say for sure which way the winds are going to blow.
Of course, not everyone will want to wait until they know for sure to take a position buying, buying more, HODLing, or selling. However, those new to the space might benefit from understanding that a Bitcoin is not judged based on price action over an hour; it is judged based on waves of sustained price action over time.
The next day or two should provide clarity. By the time things are clear, we could easily be up or down another $1k, but of course, that is the nature of a volatile asset like Bitcoin.
The only word of advice I’d give is “beware of panic selling and FOMO buying.” This isn’t the first quick $1k price movement we have seen since in recent history. Some of those have been upward movements that resulted in an uptrend, some have been downward movements that resulted in a downtrend, and some have been just quick moves up or down ended in a retrace back to the starting point. Reacting quickly can work wonders at times, but it is also the sort of thing that can lead to really big losses (if stops aren’t set, and big positions are taken).
Those who went short at $6.9k or lower without a stop risked closing at $8k! Those who went long at $8k or lower now risk retracing back to the $6ks. Those are big numbers, and they are can come on quickly in a market like this. Not everyone has the risk tolerance for that sort of thing or the skills to deal with that, so if you don’t, make sure to account for that.
A new uptrend could start a wave that lasts days, weeks, months, or even years. Or this could all result in a move back down in the near future.
There is a chance that either direction could involve another really big move, so make sure to position yourself in a way that works for you and gives you the leg room to sit back and enjoy the ride.
Bottomline: All that sidewise movement in the $6ks burst into a giant green candle and caused a short squeeze. Now the next move will help determine the direction of Bitcoin and to some extent the crypto market. These are exciting times, and there is likely to be more volatility. Make sure to keep on your toes and avoid giving in to the urge to FOMO buy or panic sell. It is better to stick to your strategy and avoid rash moves based on emotion.