Bitcoin ETF Decision Behind Large Number of Short Sells, Analysts Believe

Francisco Memoria
  • The US Securities and Exchange Commission (SEC) is set to decide whether to approve or reject two Bitcoin ETFs tomorrow, August 23.
  • The market, analysts believe, expects their rejection, and as such short sells have been growing.

Bitcoin, recently managed to break through the $6,600 resistance after adding $400 in about 20 minutes as scheduled maintenance at derivatives exchange BitMEX triggered a massive short squeeze. The squeeze, some analysts believe, could be an indirect consequence of an upcoming bitcoin ETF decision.

As CryptoGlobe covered, the US Securities and Exchange Commission (SEC) set August 23 as the deadline for its decision on two bitcoin exchange-traded funds (ETFs): the ProShares Bitcoin ETF and the ProShares Short Bitcoin ETF.

A potential crypto ETF has been heavily influencing the market in the last few weeks. Earlier the SEC rejected the Winklevoss twins’ ETF application, a move that saw BTC lose 3.5% of its value.

The regulator’s decision on the ProShares ETFs comes at a time in which BTC shorts came close to an all-time high. As covered interest in shorting bitcoin surged this month, as the flagship cryptocurrency was unable to breach the $6,600 resistance.

As founder Alex Sunnarborg put it:

Unlike the VanEck-SolidX Bitcoin ETF, set to be decided by September 30, the ProShares ETFs are backed by BTC futures contracts, sourcing their liquidity directly from the Chicago Mercantile Exchange (CME) and the Chicago Board Options Exchange (CBOE), two regulated exchanges trading BTC futures.

The VanEck-SolidX ETF is set to be backed by actual bitcoin, and to get its liquidity primarily from over-the-counter (OTC) desks, whose volume surpasses that of the regulated exchanges futures contracts, Sunnarborg pointed out.

Taking these factors into account, he added the market is likely expecting the ProShares ETFs to be rejected, and a BTC price fall as a result. Given the short sells’ all-time high, he predicted the short squeeze would come

Although the market expects the rejection of the ProShares ETFs, the VanEck-SolidX ETF decision may see the world’s first bitcoin ETF enter the market as the flagship cryptocurrency is about to see added liquidity in secure, regulated products like Bakkt’s physically settled futures contracts, and Fidelity’s exchange-traded note (ETN).

As other analysts point out, however, a bitcoin ETF may be further than expected as the cryptocurrency’s volatility is detrimental towards its approval. The recent short squeeze saw the cryptocurrency add about $400 in only 20 minutes, and wasn’t an isolated case as in July another squeeze cost short sellers $180 million in a similar time period, in which bitcoin surged $600.

As Krüger put it, even if the market isn’t being manipulated – something the US Department of Justice has launched a criminal probe into – BitMEX’s influence over the market is notable, as it is an unregulated exchange trading over $3 billion worth of crypto every day. As covered, it traded a record $8 billion in 24 hours last month

CZ Explains How Binance Dealt With Aftermath of $40 Million Theft

On Sunday (May 19), Changpeng Zhao (aka "CZ"), the Co-Founder and CEO of digital asset exchange Binance, told the crypto community what he and his team had been up to since the May 7 security breach that resulted in a theft of over 7,000 BTC from their Bitcoin hot wallet. 

What Happened on May 7?

According to CZ, the hackers involved in the security breach somehow managed to get control over a number of user accounts and structured large withdrawals from these accounts in such a way thay managed not to be detected/noticed by Binance's "pre-withdrawal risk management checks." Their "post-withdrawal risk monitoring system" only noticed something was wrong after the hackers had moved the stolen BTC off of the exchange via a single transaction, at which time it immediately suspended all "subsequent withdrawals." 

At first, the Binance team was not exactly sure what had happened, and so they decided that the safest course of action was for CZ to send out a tweet to say that the "withdrawal servers" were in "unscheduled maintenance mode" while the team was investigating the incident. 

Communication With the Crypto Community

Once the team had confirmed that the exchange had been hacked, information about the security incident was broadcast to the outside world via all of Binance's communication channels (such as Telegram, Twitter, and Medium). 

Since the team could not be sure which user accounts the hackers had access to, it was decided that it would be too risky to allow further withdrawals to be made until the team had the chance to make "significant changes" to the platform (to make it more secure). Binance's announcement on May 8 estimated that the exchange needed to do "a thorough security review" and estimated that this would take about "ONE WEEK," and that during this period, "deposits and withdrawals" would need to "REMAIN SUSPENDED."

By being fully transparent in their communication with Binance users, they were able to receive "tremendous support" from them.

CZ's Periscope AMA Session on May 8

Seeing CZ live put much of the Binance community "at ease." Unfortunately, because CZ had been up all night, he was not in an ideal mental state when he did the AMA. Just before the AMA, his team told him that a Bitcoin Core developer had suggested that it would be technically possible to roll back the single Bitcoin transaction carried out by the hackers by "hugely incentivizing the miners." CZ made the unfortunate mistake of mentioning this "reorg" idea (which he now realizes is a "taboo topic") during the AMA, for which he took a heavy beating (especially from hardcore Bitcoin maximalists) on Twitter (and elsewhere). 

CZ's Mental State Right After Being Told About the Bitcoin Theft

Although he was in a "F***, F***, F***” state" for around 10 seconds, a few moments later, he "began to come to terms with it," and a quick mental calculation told him that the theft of around 7000 BTC (equivalent of around $40 million at the time) could be fully covered by their SAFU fund. Meanwhile, his team had already gone into "War Mode", and their professionalism and support cheered up CZ. 

Support From the Crypto Community

Binance received support from many sources: people defending him and Binance on social media platforms, and helping to answer questions; the Binance Angels (who are all volunteers) "addressing questions" and "reassuring" users on "multiple communities"; analytics firms helping with the tracking of the stolen funds; exchanges and wallet services offering to help by blocking "any deposits associated with the hacker addresses"; and "numerous offers for help from law enforcement agencies around the world."

A Blessing in Disguise?

"Speaking with various team members, and as correctly analyzed by community members, such as Gautam Chhugani, this incident may actually be a good thing for us in the long run. Security is a never-ending practice. There are always more things to do in security, and we have implemented many of them in this last week and will continue to implement more in the future. Given this incident, Binance has actually become far more secure than before, not just in the affected areas, but as a whole."