Here's Why Bitcoin Is Up 11% Today
After starting April with a dismal performance, bitcoin (BTC-USD) is soaring on Thursday, with the leading digital currency up by nearly 11% as of 9:00 a.m. EDT. Other major cryptocurrencies are following suit, with all of the 10 largest cryptocurrencies in the green and eight of them up by double digits.
While today's price action is likely the result of a few factors, here's a rundown of where the cryptocurrency market stands today and what could be causing the upward momentum.
Today's cryptocurrency prices
Here's a look at the 10 largest cryptocurrencies by market capitalization and how much each has changed over the past 24 hours.
Is tax selling over?
Earlier this week, I wrote an article about how cryptocurrency investors who have profited from sales of their coins may owe the IRS more than they are capable of paying with cash they have on hand. So, it was fair to assume that as the April 17 tax deadline approaches, there could be selling pressure as cryptocurrency investors sell some of their digital currency holdings in order to cover their tax bills. In fact, this could be a big reason for bitcoin's slow start to April.
However, I also mentioned in the article that it generally taxes a few days to convert cryptocurrency profits into usable cash in a checking or savings account. Since there are only a couple of weekdays left until Tax Day, it's possible that the peak of this tax selling is now behind us.
Short covering could be a major factor
Another possible factor in bitcoin's (BTC-USD) sudden jump is a short squeeze, brought on by a wave of traders covering their short positions. Until recently, short squeezes in bitcoin weren't a major concern. However, with this year's rollout of bitcoin futures, traders have the ability to bet against bitcoin. And although there aren't futures for the alt-coins in the chart, bitcoin's momentum could certainly be fueling the surge in the entire cryptocurrency market.
If you're not familiar with the concept of a short squeeze, here's a simplified explanation.
Let's say that you short-sell 100 shares of a stock currently trading for $100, so you're hoping to profit as the price falls. Instead, the stock price jumps up to $110, meaning that you're $1,000 in the red. So, you decide to cut your losses and cover your short by buying shares. As this happens, it creates additional demand for the stock, and has the effect of adding to the upward pressure. And if the stock price gets high enough, traders can be forced to cover their positions, even if they don't want to.
Short squeezes are generally characterized by sharp, rapid moves, which is exactly what we saw in bitcoin Thursday morning. In fact, most of bitcoin's gain occurred in a span of just a few minutes around 7:00 a.m. EDT. It's entirely possible that some buyers came into the market, and as the price climbed, short covering kept the upward trajectory alive.
CNBC contributor Brian Kelly thinks that this is exactly what happened. "Once [bitcoin] broke higher, shorts were squeezed and forced to cover," he said.
A sustained upward move or just a quick pop?
It remains to be seen whether buyers are coming back into bitcoin (BTC-USD) and other cryptocurrencies or if Thursday morning's price action is just a quick rebound and nothing more. After all, while short squeezes tend to be over quickly, if tax selling is truly coming to an end as several analysts are suggesting, it could mean a sustainable change in the supply/demand dynamics.
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Matt Frankel owns Ethereum and Litecoin tokens. The Motley Fool has no position in any cryptocurrencies mentioned. The Motley Fool has a disclosure policy.