The world’s two biggest cryptocurrencies, Bitcoin (BTC) and Ether (ETH), face risks from a potential short squeeze in the US dollar index, a trend that could lead to significant price fluctuations.
According to a report by crypto options trader QCP Capital, the dollar index is poised for a bullish boost that could translate into increased demand for the US dollar. This, in turn, could potentially result in a short squeeze situation for the dollar.
“As investors get scared, they start to dump seemingly overpriced assets like cryptocurrencies and stocks, and buy safe-haven assets such as the US dollar, gold, and Treasuries,” QCP Capital’s report said.
The report cited a number of factors that could trigger a short squeeze in the dollar index, including a rise in US Treasury yields, an increase in inflationary pressures, and a potential reduction in fiscal stimulus measures.
Should such a scenario play out, cryptocurrencies could be at risk of losing value as investors look to sell off what they perceive as riskier assets. Bitcoin and Ether, in particular, have enjoyed strong price gains over the past year, putting them firmly in the crosshairs of risk-averse investors.
“Bitcoin and Ether are highly speculative assets that have benefitted from a flood of liquidity and an amply accommodative monetary policy,” QCP Capital’s report stated. “While we anticipate robust support in the event of any pullback, it is plausible that we may witness a steeper than average correction as a result of an extreme squeeze in liquidity.”
The report warned that investors should be on the lookout for any signs of a dollar short squeeze, as it could have significant implications for the broader financial markets. “It is crucial to monitor the US dollar, as any liquidity crunch could have a ripple effect on all other risk assets, including cryptocurrencies,” the report said.
However, the report also noted that Bitcoin and Ether have shown an ability to recover quickly from price corrections, particularly in the face of growing mainstream adoption.
“Any pullback could potentially create an opportunity for new investors to enter the market, and we see this as a healthy development for the long-term growth of cryptocurrencies,” the report concluded.
Bitcoin and Ether have both enjoyed strong performance over the past year, with Bitcoin reaching an all-time high of over $64,000 in April 2021, and Ether reaching its own all-time high of over $4,300 in May of the same year.
While both cryptocurrencies have seen some price volatility in recent months, they continue to be viewed by many investors as valuable long-term investment opportunities due to their potential as digital stores of value. However, their future price movements will continue to be subject to a range of unpredictable market factors, including potential short squeezes in the US dollar index.
Bitcoin (BTC) and Ether (ETH), the top two cryptocurrencies by market value, have experienced significant rallies of 70% and 56% respectively this year, outpacing traditional risk assets. However, this trend could reverse if the heavily shorted US dollar experiences a short squeeze, according to Singapore-based options trading firm QCP Capital. The firm’s markets insights team noted that the biggest obstacle to crypto remains the USD, which it claims is heavily positioned to the short side and vulnerable to a short squeeze.
A short squeeze occurs when an asset that is heavily shorted moves higher, forcing bears with open short positions to buy back the asset to cover losses, adding to upward pressure on prices. The correlation between the price of bitcoin and the dollar index has historically moved in opposite directions, and this negative correlation has recently strengthened.
The dollar index, which gauges the greenback’s exchange rate against major fiat currencies, fell over 13% since peaking at 114.78 in late September last year on hopes that the Federal Reserve (Fed) would pivot away from interest rate hikes. If the Fed chairman maintains a data-dependent policy stance on 4 May, it could trigger a short squeeze in the greenback, if it contradicts market expectations for renewed rate cuts.
Looking at Fed pricing, it can certainly be said that the pivot is fully priced in, according to QCP’s markets insights team. It is the US banking crisis/debt ceiling/recession that will expose the beta for the USD from now on. It believes that the 12% drop in the USD is pricing in the more pessimistic scenarios on these three, which it says makes it ripe for a short-term squeeze.
The Fed funds futures reveal that traders expect the Fed to deliver a final 25 basis point rate hike on 4 May and resort to rate cuts from July. The central bank started its tightening cycle in March last year, which impacted risk assets including cryptocurrencies, and has raised rates by 475 basis points since then.
Two weeks ago, the dollar index bounced up from levels close to its February low of 100.82, confirming the bullish “double bottom” pattern in technical analysis. The pattern indicates that buyers have held strong twice around the same area, creating a floor for a move higher in prices.
QCP Capital’s insights team noted a positive divergence in the relative strength index and MACD, and a potential double bottom at 101. The key level to the topside for the USD is 102.5, and a break higher could lead to a sharp correction lower in crypto.
In summary, cryptocurrencies should be prepared for a possible short squeeze if the heavily shorted US dollar experiences a bounce in correlation with the expected Fed’s monetary policy. While the US banking crisis/debt ceiling/recession would be the beta exposure for the USD, traders and investors eye the bullish technological analysis and bullish indicators on the greenback that could be triggered if the dollar index breaks higher above 102.5.
