Bitcoin has risen this week after Elon Musk, the CEO of Tesla TSLA, gave the cryptocurrency an implicit endorsement.
As a long-running battle between bullish retail traders organised through Reddit's WallStreetBets forum and Wall Street hedge funds that have long been shorting GameStop shares reached its climax—with regulators and brokerages attempting to calm frantic markets with heavy-handed restrictions—Musk sent the bitcoin price higher.
Hedge funds are already shorting bitcoin to the tune of more than $1 billion, according to data, even as regular traders flock to bitcoin and other cryptocurrencies.
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Hedge funds have been increasing their bitcoin short positions—effectively bets that the price of an asset will fall—since the bitcoin price began climbing in October, data from crypto news and analysis company The Block showed.
The net short position in bitcoin futures is now the biggest it has ever been, according to the CFTC's latest Traders in Financial Futures report.
The bitcoin price has soared around 200% since October, surging to over $40,000 per bitcoin before falling back slightly. The blistering bitcoin rally has largely been put down to institutional investors warming to the cryptocurrency and payments giants such as PayPal PYPL PYPL adding their support—though bubble fears have emerged.
As hedge funds increasingly bet against the bitcoin price, to some extent covering their long positions, retail traders empowered by apps and bored by lockdowns are speculating on bitcoin and everything else.
"Being stuck at home due to pandemic lockdowns and restrictions seems to have spurred an influx of day traders," Frédérique Carrier, head of investment strategy at RBC Wealth Management, wrote in a note.
"Investor attitudes are being shaped by the headline-making gains of some high-profile issues. For example, the 35% gain made by bitcoin in the first nine days of 2021, on the heels of a fivefold surge in price from March to December 2020; or the more-than-sixfold increase in GameStop shares in less than two weeks to January 26; or even Tesla, now the fifth-largest stock in the S&P 500 by market capitalisation, with a market cap larger than that of the major U.S., European, and Japanese automakers combined."
The Block
Brokerage eToro, after adding 5 million users through all of 2020, registered 1 million more in the first month of 2021—suggesting demand for equity and cryptocurrency trading is still growing among causal investors.
Meanwhile, many in the bitcoin and cryptocurrency community have been quick to encourage the idea retail traders should turn to crypto.
"With Robinhood halting trading of certain assets like GameStopGME and Nokia and NasdaqNDAQ president and CEO Adena Friedman calling for regulations to prevent retail investors from coordinating on social media, the case for cryptocurrencies only grows stronger," Nicholas Pelecanos, head of trading at NEM, said in emailed comments. "I believe we will witness a new wave of investors come over Bitcoin and other major crypto assets as a result of this debacle."