Traders are pitching Celsius (CEL) customers on a dubious trading strategy based on the idea of a CEL short squeeze. Coordinators spread the message on social media and the token has briefly rallied ⏤ and quickly retraced gains ⏤ amid momentary fits of manic buying.
Sponsors claim that crypto exchanges are somehow “running out” of CEL inventory to lend to short-sellers and that CEL can somehow reach $100 per token ⏤ always with the proverbial “not financial advice” disclaimer.
In reality, influencers are misleading investors with a short-sell that’s not even a short-sell. Here’s why.
Understanding the mechanics of a real short squeeze
Short squeezes rarely, if ever, occur in crypto. In traditional finance, a short-seller borrows an asset, sells it, and then promises to buy back the asset to cover its loan in the future ⏤ hopefully, at a lower price. An actual short squeeze occurs when, unfortunately, the cost to buy back short-sold assets begins to rise asymptotically.
History’s most famous short squeeze occurred in Volkswagen. In October 2008, shares of the car-maker quintupled in two days due to a threat by Porsche to acquire 74.1% of its stock. As short-sellers scrambled to rebuy shares to cover their position at any price available, Volkswagen briefly eclipsed ExxonMobil to become the largest company in the world for one day.
Short squeezes typically happen when more than the usual number of short-sellers try to repurchase stock to return to their owners. Other investors may also anticipate the short squeeze and snap up stock, making short-selling increasingly expensive.
On the contrary, crypto exchanges rarely bother with actually locating, borrowing, and clearing assets from short-sellers. Instead, most customers trade synthetically, expressing a bearish view through cash-settled derivatives.
Here, the exchange creates the bearish derivative, captures commissions and the spread, and avoids the hassle of real short-selling. FTX offers a derivative product known as perpetual futures contracts for several digital assets, including Celsius Network (CEL) tokens.
Indeed, for the vast majority of so-called “short” positions on crypto exchanges, no tokens were actually sold short. Instead, traders simply bought bearish, cash-settled derivatives.
CEL short squeeze promoters are full of it
Protos was able to access a website promoting the so-called CEL short squeeze during the July 9-10 weekend. The site became inaccessible the following day.
It’s questionable why traders should attempt a CEL short squeeze for a company teetering on the edge of bankruptcy. This weekend, Celsius hired its second restructuring law firm, Kirkland & Ellis, to advise on options that include a potential bankruptcy filing.
To be clear, coordinating the buying of futures contracts is not the same as a short squeeze. Futures contracts give their holders the right to have the underlying asset delivered in the future.
These do not involve borrowing the asset to sell and then buy back. Worse, most crypto futures are cash-settled, meaning that no actual delivery of CEL tokens would occur.
CEL short squeeze would be trivial for exchanges
Even if a minor amount of actual short-selling of CEL token has occurred, it will likely be immaterial to the oceanic liquidity of crypto exchanges that offer Celsius perpetual futures contracts, like FTX.
FTX’s lending and borrowing desk is crypto’s second most liquid over-the-counter (OTC) dealer. Outranked only by Genesis, it maintains relationships across the world for locating and sourcing borrows from owners of any FTX-listed token ‘round-the-clock, including CEL.
Moreover, due to the expansive power of modern crypto exchanges, they are able to prevent almost any short squeeze. Executives at major exchanges are simultaneously broker, custodian, clearinghouse, market-maker, data aggregator, broker, lender, indexer, issuer, transfer agent, dealer, matching engine, compliance, software provider, insurer, publicist, webhost, advertiser, and exchange owner — all in one.
In traditional finance, all of these tasks are regulated and serviced by separate companies. In crypto, a CEO can theoretically halt a short squeeze with a mere phone call.