In a significant turn of events, hedge funds seem to be increasing short positions in Ethereum at an unprecedented pace, raising concerns about whether the second-largest cryptocurrency by market cap might be encountering difficulties—or if there are other factors involved.
According to esteemed analysts from the Kobeissi Letter (@KobeissiLetter), short selling in Ethereum “has now surged by +40% in JUST ONE WEEK and +500% since November 2024.” Their analysis, shared on X, asserts that “never has Wall Street hedge funds been so heavily short on Ethereum, and the gap is substantial,” leading to the question: “What insights do hedge funds possess about upcoming developments?”
Is a Massive Ethereum Short Squeeze Approaching?
The Kobeissi Letter’s discussion underscores a stark contrast between Ethereum’s market movement and the futures positioning among hedge funds. They highlight an especially turbulent moment on February 2, when Ethereum plummeted by 37% within just 60 hours as trade war news circulated, erasing over a trillion dollars from the crypto market “in just HOURS.”
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The analysts point out how ETH inflows were strong during December 2024—even while hedge funds were reportedly enhancing short exposure. The Kobeissi Letter states: “Within just 3 weeks, ETH attracted over $2 billion in new investments, including a record weekly influx of +$854 million. Yet, hedge funds are wagering against ETH’s rise while limiting subsequent breakouts.”
They further emphasize the noticeable increases in Ethereum trading volume, particularly on January 21 (Inauguration Day) and leading up to the February 3 crash. Despite the unprecedented inflows, Ethereum’s price has “struggled to recover from the recent drop even after a week has elapsed,” currently trading “~45% below its all-time high reached in November 2021.”
One of the major enigmas is why hedge funds are so committed to shorting ETH. The analysts remark: “Possible explanations range from market manipulation, to benign crypto hedges, to pessimistic views on Ethereum itself. However, this is rather peculiar as the Trump Administration and new regulators have supported ETH. Due to this extreme positioning, Ethereum has notably underperformed compared to Bitcoin.”
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The Kobeissi Letter wraps up its thread by directing attention to Bitcoin’s superior performance and questions whether a short squeeze could be on the horizon: Is Ethereum preparing for a short squeeze? This extreme positioning suggests large fluctuations like the one on February 3rd may become more frequent. Since the beginning of 2024, Bitcoin has increased by ~12 TIMES more than Ethereum. Is a short squeeze about to bridge this gap?”
Glassnode’s CryptoVizArt Responds
Not every participant in the crypto analytics realm is convinced that the influx of Ethereum short positions indicates a bearish sentiment. Senior researcher at Glassnode, CryptoVizArt.₿ (@CryptoVizArt), utilized X to contest the sensationalist narratives circulating on social media: “Barchart is proclaiming, ‘Largest ETH short in history!’ and crypto Twitter is reacting frantically. Honestly, if you fell for this attention-grabbing headline, it’s time to elevate your understanding. Let’s clarify the facts.”
In a thorough thread, CryptoVizArt highlights that the popular chart tracking hedge fund short positions likely depicts only a fraction of the market (e.g., “Leveraged Funds / Hedge Funds/CTAs”) and overlooks other substantial market participants such as asset managers, non-reportable traders, and on-chain holders. They also note that similar “massive shorts” occurred in Bitcoin futures as well, yet BTC outshined ETH during that timeframe.
Moreover, CryptoVizArt stresses that CME Ether futures are merely a fragment of the global crypto derivatives landscape. Liquidity on exchanges like Binance, Bybit, OKX, along with on-chain positions and spot markets, provides a more comprehensive overview than what any single exchange’s data may indicate. “The net short position of one group does not equate to the entire market being net short. Hedged positions do not inherently mean bearish bets.”
Their concluding observation: much of the positioning might be part of “non-directional strategies—like cash-and-carry,” which are neutral tactics employed to secure arbitrage profits and should not be viewed merely as direct bets against ETH.
At the time of this report, ETH was priced at $2,629.
Featured image created with DALL.E, chart from TradingView.com
