Hedge Funds Betting Against S&P 500: Good News for Bitcoin and Crypto?

As hedge funds’ short positions in S&P 500 futures reach 12-year highs, some experts believe a short squeeze could also play well for digital assets


Immersion Imagery/Shutterstock, modified by Blockworks


As hedge funds increase bearish bets on US equities, with S&P 500 futures short positions at a roughly 12-year high, experts are pondering the potential impacts on the crypto market.

The S&P 500 COT Index, which represents the difference in net positions between large non-commercial speculators and large commercial hedgers, is now at its lowest point since Sept. 19, 2011.

A decrease in the index suggests large non-commercial speculators, including hedge funds, have become more bearish about the US stock market compared to large commercial hedgers. This shift in sentiment could indicate a negative outlook or increased uncertainty in the market.

It also opens up an opportunity, according to Ruslan Lienkha, chief of markets at YouHodler: A build-up of short bets in traditional equities could bode well for risk assets, including crypto.

“Due to the fact that there is now an increased correlation between the dynamics of American indices, gold and bitcoin, closing short positions on the S&P500 may also trigger a short squeeze reaction, which will also significantly support the prices of bitcoin,” Lienkha told Blockworks.

A short squeeze occurs when a rapid increase in an asset’s price forces short sellers to close their positions, causing the price to rise even further due to increased buyer demand.

Bitcoin (BTC) remains little changed over a 24-hour period near $29,100 though its performance for the year is up more than 75% alongside Ether’s (ETH) 58%. The S&P 500, by contrast, is up roughly 6% over the same period.

Price action can can be driven by short squeezes or investors getting more constructive and “taking a swing,” Owen Lau, executive director at Oppenheimer, told Blockworks.

“Additionally, the banking crisis makes people think about alternatives and where they can put money into,” he said.

Markus Thielen, head of research at Matrixport, agrees stating a short squeeze in stocks could push bitcoin higher, especially as corporate buybacks are slated to resume next week in the wake of the US corporate earnings season.

Though not all market participants are on the same page.

Brian Fu, co-founder of zkLend, an L2 money-market protocol built on StarkNet, notes that the overall likelihood of a short squeeze is low. The co-founder points to economic fundamentals that have yet to improve, as well as persistently high inflation.

“Most other digital assets are being seen closer to traditional equities, with increasing correlation to general market sentiments. Therefore, it is more likely to be [a] downside scenario for these other digital assets,” Fu said.

Even so, there remains a silver lining, Fu suggests. Bitcoin and other key tokens with large market caps could benefit from the diversion of funds from traditional equities markets. Though sentiment remains cautious overall, Fu said.

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