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Bitcoin Rally Could Trigger Short Squeeze, Galaxy Research Chief Warns

Optimism for a US ETF approval sparks renewed momentum in the crypto market.

by Alexander
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In the wake of renewed optimism surrounding the potential approval of a US Bitcoin exchange-traded fund (ETF), the cryptocurrency market is showing signs of life after a period of stagnation. This resurgence has driven significant gains in Bitcoin (BTC) and Ether (ETH) prices. Alex Thorn, the head of firm-wide research at Galaxy, has raised the possibility of a gamma squeeze for Bitcoin, the world’s largest digital asset.

What is a Gamma Squeeze?

A gamma squeeze is a situation that compels options dealers to rapidly adjust their spot exposure, typically leading to increased price volatility. Negative gamma, as Thorn explained, forces dealers to purchase substantial amounts of Bitcoin as its price rises to maintain a delta-neutral position.

Thorn highlighted that if Bitcoin‘s price were to reach the range of $35,750 to $36,000, options dealers would need to acquire an additional $20 million worth of spot Bitcoin for each 1% increase in price.

Factors Influencing the Market

Despite last week’s options expiries, Thorn believes that the conditions for a gamma squeeze remain feasible. He also noted a growing disparity between Bitcoin held by long-term investors and that which has moved in the last 24 hours, indicating reduced on-chain liquidity.

Based on the 4-year rolling Z-score, Thorn asserted that Bitcoin remains structurally sound and not overvalued. Notably, he pointed out that 83% of Bitcoin’s supply has not been moved since it was priced lower than it currently is, indicating a tight cost basis between the current price and the range of $38,400 to $39,100.

Differing Opinions

While Thorn’s analysis has found some agreement, others like Lachlan Feeney, founder and CEO of Labrys, anticipate a calmer market after the recent activity. Le Shi, Head of Trading at Auros, cautioned against overestimating the impact of the assumed $20 million worth of purchases per 1% price increase, citing Bitcoin‘s liquidity and the likelihood of long gamma position holders hedging in the opposite direction during a rally.

In conclusion, the cryptocurrency market is abuzz with the potential for a gamma squeeze in Bitcoin, driven by renewed ETF optimism and increased price volatility, but differing opinions exist regarding the extent of its impact.

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