With hedge funds ramping up bearish bets on U.S. stocks, with short positions in S&P 500 futures at a roughly 12-year high, experts are weighing the potential impact on the crypto market.
The S&P 500 COT index, which represents the net spread between large non-commercial speculators and large commercial hedgers, is at its lowest level since September 19, 2011.
Source: Macro Micro
The falling index suggests that large non-commercial speculators, including hedge funds, are more pessimistic about U.S. stocks than large commercial hedgers. This change in sentiment could indicate negative expectations or increased uncertainty in the market.
According to Ruslan Lienkha, chief market officer at YouHodler, it also opens the door: accumulating traditional short bets on stocks bodes well for risky assets, including cryptocurrencies.
“Closing short positions on the S&P 500 could also trigger a short squeeze reaction due to the current increased correlation between the dynamics of US indices, gold and Bitcoin. This will support BTC prices significantly.”
A short squeeze occurs when a rapid rise in the price of an asset forces short sellers to liquidate their positions, causing prices to rise due to increased demand from buyers.
Bitcoin price is up more than 3% in the past 24 hours and is currently trading at $29,821. Meanwhile, the S&P 500 is up about 2% over the same period.
According to Oppenheimer managing director Owen Lau, the price action could be driven by a short squeeze or investors “starting to falter”.
“Additionally, the banking crisis has people thinking about alternatives and where they can put their money.”
Markus Thielen, director of research at Matrixport, agreed that short-squeezed stocks could push bitcoin higher, especially as U.S. corporate imports are expected to resume next week after earnings season ends.
But not all market participants share this view.
Brian Fu, co-founder of zkLend, an L2 money market protocol built on top of StarkNet, noted that the overall probability of a short squeeze is low. Because the economic fundamentals have not improved, and persistently high inflation.
“Most other digital assets are viewed more like traditional equities, and they are increasingly correlated with overall market sentiment. So this is a more likely bearish scenario for these other digital assets.”
Even so, in Fu’s view, there is still a glimmer of hope. Bitcoin and other major market cap coins will benefit from the transfer of funds from traditional stock markets. However, overall sentiment remains cautious.
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