Price Discovery + BTC Analysis

Price Discovery

By short selling Bitcoin, shorts engage in a practice defined as price discovery, in this instance short sellers are attempting to “discover” a new price low. In this article I highlight their current attempts, previous attempts, and the overall impact this can have on the market.

“Price Discovery: By providing a contrarian point of view and going against the crowd, short sellers facilitate price discovery for stocks.” -Definition by Investopedia

The above chart is a visualization of Short selling efforts and price discovery.
For this analysis we utilize engulfing candles, rate of change, and trading ranges.

Bearish Engulfing candles, are price discovery attempts. Bears sell short, and attempt to decrease Bitcoin’s price.
Volume, demonstrates current interest in Bitcoin’s price. High volume bars signify buyer interest at current market price.
Bearish Engulfing candles, are bulls coming in strong and signaling that price currently after a discovery is of interest. Hence executing market orders and elevating the price upwards.
Rate Of Change, for the case of this study we’re going to utilize a switch from negative high volume bars, to positive green high volume bars at a certain price.
Trading Ranges, the orange lines represent support and resistance levels.
Reflexive, knee-jerk type of reaction, otherwise referred to as an “automatic rally”

Current intra-day price action signifies that price discovery to the downside is being countered by positive buy volume. And currently price action is to the upside as Bitcoin is climbing through the trading ranges and establishing new levels of support at previous resistances. Price is reactive, and is buy volume is entering the chart reflexively at range lows where price discovery meets Market Maker interest.

The Big Picture, Efficiency

Over the past weeks we’ve seen a rather high increase of short selling activity. We’ve published on BTCUSDSHORTS since 8/13 as we’ve been looking forward to a short squeeze.

It is no secret that short interest is at all time high, but how efficient are short selling efforts currently, and what are they achieving?

Short sellers sell to profit in a declining market, upon doing so when price meets demand the asset’s value turns around. And then conversely longs profit from an increasing value. Price discovery happens in the process.
Examining the above chart we evaluate the efficiency of short selling efforts. starting august 8th when Bitcoin entered the current trading range.

Upon entering the current trading range of a range high of $6,600 and a range low at $5,968 The amount of short sellers increased from 25,000 to a current 38,000 with a peak of 39,655.

The trend lines overlay on the chart in cyan, demonstrate price constriction to the upside in an ascending triangle fashion. Hence the latter portion of this trading range is consolidating in a bullish formation. Yet short selling is at all time high. With many short positions currently open at a loss.

If the intended effect of short selling was price discovery to the downside, then the reflexivity at the current range low has been defined, as the low has only been tested once. If the intended effect was profiting from a declining market, then it is safe to assume that shorts sellers are currently in a shaky territory.

 

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