Could Ethereum be Primed For a Massive Short Squeeze?

Short positions on ETH have increased dramatically by about 40% in one week and 500% since November, resulting in record levels.

“Never in history have Wall Street hedge funds been so short of Ethereum, and it’s not even close,” exclaimed the Kobeissi Letter on Feb. 10.

The effects of this “extreme positioning” were seen earlier this month when crypto markets crashed, hitting Ethereum hard. The asset dumped 37% in 60 hours as Trump’s trade war headlines emerged.

“It felt almost like the flash crash seen in stocks in 2010, but with no headlines,” it added.

Ethereum Short Squeeze

Despite all the negativity and buildup of short positions, Ethereum ETFs added $2 billion in new funds in December while achieving a record weekly inflow of $854 million. Trading volume has been strong, with spikes after Inauguration Day and the February crash, Kobeissi noted.

Previous concerns about SEC classifying ETH as a security appear to be diminishing. The Trump Administration seems supportive of ETH, and Eric Trump’s positive comment about ETH briefly affected prices last week.

Nevertheless, Ethereum is still trading 46% down from its November 2021 all-time high, which begs the question, “Why are hedge funds so dedicated to shorting Ethereum?”

What is happening with Ethereum?

Short positioning in Ethereum is now up +40% in ONE WEEK and +500% since November 2024.

Never in history have Wall Street hedge funds been so short of Ethereum, and it’s not even close.

What do hedge funds know is coming?

(a thread) pic.twitter.com/knsyOhYyyt

— The Kobeissi Letter (@KobeissiLetter) February 9, 2025

There is a strong possibility of a short squeeze due to the extreme level of short positioning, the large gap between Bitcoin and Ethereum’s performance, and BTC being up approximately 12 times more than ETH over the past year or so.

A short squeeze occurs when a heavily shorted asset like ETH starts to rise in price, forcing short sellers to cover their positions by buying back the asset to cut their losses.

This buying pressure then pushes the asset even higher, forcing more short sellers to cover, creating a rapid upward spiral in price. Given the reported 500% increase in ETH short positions over the past three months, a short squeeze could be particularly dramatic.

With so many short positions, this could create massive buying pressure, driving the price up very quickly and potentially closing some of that gap with Bitcoin’s performance.

The impact could be especially significant because institutional investors holding these large short positions typically use leverage, which means they might need to cover their positions quickly if the market moves against them, potentially amplifying the squeeze effect.

However, it should be noted that while short squeezes can cause dramatic price increases, these are often temporary, and the price may settle back down after the squeeze plays out.

End of Altseason?

Back to the current situation, ETH prices continue to crumble as the asset has lost 17% over the past fortnight.

ETH dipped to an intraday low of $2,540 before a minor recovery to trade at $2,630 at the time of writing. However, traders and analysts have spotted similarities in chart patterns, noting that February has been historically bullish for ETH.

Ethereum is mirroring 2020’s breakout structure.

Next stop: $6K+ pic.twitter.com/MeAxfMOnIj

— Merlijn The Trader (@MerlijnTrader) February 8, 2025

Meanwhile, altcoins are taking the brunt of today’s market decline as BTC dominance increases again, approaching 62%.