Is a Short Squeeze Coming? Hedge Funds Push ETH to the Brink

Ethereum, the second-largest cryptocurrency by market cap, is under significant pressure as hedge funds ramp up their bearish bets. Despite the broader crypto market showing signs of recovery, Ethereum has been left trailing. Since November 2024, short positions against Ethereum have surged by 500%, reaching record highs, according to data from The Kobeissi Letter. This aggressive shorting signals growing concerns about Ethereum’s near-term stability.

Record-Breaking Short Positions

This sudden rise in short positions created ripples in the market, with futures contracts on the CME peaking at 11,341. In just one week, bearish bets jumped over 40%. This strong wave of negative sentiment has impacted Ethereum’s price, which currently hovers around $2,500, down 2% in the last 24 hours and nearly 45% below its all-time high from November 2021. Hedge funds seem to be betting heavily on Ethereum’s price falling further, raising fears about potential market volatility.

With such extreme short positioning, Ethereum could be set for a dramatic short squeeze. This happens when short-sellers are forced to buy back the asset to cover their positions, driving prices sharply higher. Given the current setup, sudden price swings like the February 3rd crash could become more common.

Bitcoin Flips Ethereum

Interestingly, while Bitcoin was enjoying a rally in 2024, gaining over 100%, Ethereum saw a minor rally of 3.5%. This disparity has created a gap between the two, with Bitcoin’s market cap now six times larger than Ethereum’s—levels not seen since 2020. Moreover, ETH’s slow performance has raised doubts on its long term goals compared to Bitcoin. Right now Bitcoin is dominating as altcoins in overall not in a good position due to delayed regulatory policies.

Major Sell-Offs and Market Reactions

The aggressive shorting coincided with a sharp price drop on February 2, when Ethereum plunged 37% within 60 hours following trade policy announcements from the Trump administration. This crash wiped out over $1 trillion from the broader crypto market, drawing comparisons to the infamous 2010 stock market flash crash. Despite this, Ethereum has seen strong capital inflows. In December 2024 alone, ETH attracted over $2 billion, with a record-breaking weekly inflow of $854 million. However, even support from figures like Eric Trump, who recently called it “a great time to add ETH,” hasn’t reversed the bearish trend.

A Potential Fix?

An X user Lola points to Ethereum’s high gas fees as a critical issue, impacting Layer-2 network performance. He suggests adopting SHIB, the largest native token on Ethereum, as a gas token to reduce costs. According to Lola, shifting Ethereum’s role to more of a store of value while using SHIB for transactions could help stabilize its price and improve its long-term outlook.

For now, Ethereum faces a staring competition with Bitcoin. The heavy short positions is a sign of further volatility, unless there is any positive development, ETH may continue to struggle against both market sentiment and its technical challenges.