What in the world is happening with crypto and the stock market? The stock market has been falling for quite some time now with the exception of AMC Entertainment which has outperformed much of the stock market recently.
We’ve been seeing massive selloffs in the stock market and now recently with crypto. Bitcoin fell below $30,000, Ethereum below $1,900 and Dogecoin to about $0.24. Should you be worried and is there something you can do to take advantage of this opportunity? Here’s what’s going on.
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China just recently made public that it would not be accepting any form of transaction relating to cryptocurrency. Beijing banned banks and payment firms from providing services related to cryptocurrency negotiations, via BBC News.
So what’s the stock markets excuse? One word, liquidation. Large institutions are liquidating their assets in the stock market causing majority of companies to tank. Lets dive in a little deeper.
Massive institutions are deleveraging
Institutions such as banks and hedge funds are deleveraging. Deleveraging is when a company decreases its total financial leverage. Deleveraging can be seen as the reduction of debt to pay off and close any obligations on a balance sheet.
Hedge funds with massive leverage are beginning to liquidate assets in both the stock and crypto markets. The reason being is that stricter regulations are being put into place that provide brokers with flexibility on margin requirements. Brokers may raise margins if they believe an institution is betting on risky options or trades.
This is exactly what we’re seeing with Citadel and AMC Entertainment. Many retail investors were surprised to hear that Citadel took a long position in AMC. My guess is Citadel went long on AMC as a form of collateral. This could benefit them should they get margined called and be forced to either liquidate some or all of their short position in AMC.
What is the primary cause of deleveraging?
The number of shorting in the stock market has increased. Especially in more recent months. We’ve seen this with both AMC and with GameStop.
The reason being is that shorting stocks has actually been very profitable due to the pandemic. Did you know that institutions can also short crypto?
According to NEWBTC, where most traders actually transact Bitcoin, much of Wall Street have been shorting it.
Although not everyone on Wall Street is bearish on Crypto, it looks like shorts got their way with the massive drop in the cryptocurrency market. Bitcoin, Dogecoin, and Ethereum are all down by 20%-25%.
How does AMC Entertainment get tied into this? AMC has been the number one shorted stock in the market for many many months now and regulators are finally beginning to take notice.
Regulations set wakeup calls
The ICC has recently passed a regulation that provides brokers the flexibility to raise margin requirements on risky trades and options (ICC-2021-007).
This is causing overleveraged institutions and hedge funds to liquidate assets in order to meet potential margin raises. Since shorting has been so big recently, they must now come up with the capital to begin covering their short positions at any given time.
They may cover partially due to raised margins or get liquidated without notice from a broker. If large institutions have enough capital to meet margin requirements then AMC will begin to experience a series of gamma squeezes.
Here’s my theory on AMC
See how there’s 1.9 million short shares available for AMC below? My theory is that hedge funds are going to continue short laddering AMC before it squeezes. The reason behind this move is so that they can close their short positions as low as possible.
With regulations getting stricter on risky short positions, hedge funds cannot afford to get a raised margin with the current price and above. They’re already losing millions every day with the short borrow fee alone.
The ICC-007 proposal provided brokers with the flexibility to raise margins on these hedge funds. Because regulations are tighter, we’re beginning to see liquidation in the stock market from overleveraged institutions such as Citadel and Melvin Capital.
Citadel, who has notoriously been shorting AMC has just recently gone long on an AMC position. I think we’re going to see a massive drop in price action before shorts begin to close their positions inevitably leading to a short squeeze. This long position will serve as collateral, or an emergency fund for them to use as they need to post-squeeze.
Will crypto and the stock market keep crashing?
Without a doubt. While some over leveraged short positions in the stock market will get closed, shorting in the crypto market will continue.
We saw a massive selloff following the news from Tesla’s CEO that they were no longer going to be accepting Bitcoin as a form of payment. Now, Elon has announced that Tesla has not sold their position in Bitcoin. However, the news drove the price lower and institutions shorting Bitcoin took advantage of it.
As for the stock market, massive liquidation to close short positions is going to send massively shorted stocks such as AMC to the moon. Most of the market will be bleeding while retail investors jumping on this trade are going to profit from a short squeeze that’s been cooking for quite some time now.
How can investors take advantage of a crypto and stock market crash?
A market crash is the perfect time to go all in on diversified stocks and crypto. I find market crashes very attractive for the reason that every investment is on sale.
Retail investors can purchase stock bulk and invest in Bitcoin for much less than its peak valuation.
I personally think the cryptocurrency market has immense potential. I do believe Bitcoin can reach 6-figures and for that reason I will be investing in it as we continue to see it bottom out.
In regards to AMC and its inevitable short squeeze, I’m adding to my position on a bloody day before it takes off to mars. There’s no doubt in my mind AMC’s investing community is getting there before Elon does.
As always, be sure to share this article with the community so we may continue to educate new retail investors!