Did A Hedge Fund Blow Up In The MicroStrategy Squeeze?

Observers in fintwit world witnessed a rollercoaster ride as a hedge fund’s risky trading strategy allegedly backfired, centered around a pair trade involving bitcoin and MicroStrategy (Nasdaq: MSTR) that ultimately saw explosive consequences.

The saga began when a claimed group of investors decided to embark on a pair trade: long on BTC and short on MicroStrategy. However, their strategy unraveled as MicroStrategy experienced an unexpected spike in share price, causing their short position to implode. With no choice but to cover their losses, the fund was forced to liquidate their bitcoin holdings, adding further downward pressure on the market.

X user and self-proclaimed bitcoin maximalist Fred Krueger summarized the situation succinctly, highlighting the cascade of events triggered by the fund’s short squeeze on MicroStrategy and subsequent bitcoin liquidations. The repercussions reverberated throughout the week, affecting various market players.

MicroStrategy’s CEO, Michael Saylor, stands to benefit from this chaos, as the fund’s sell-off presents him with an opportunity to buy at lower prices, bolstered by a fresh infusion of $600 million.

Shortly after unveiling the new $604 million offering, Saylor revealed the purchase of an extra 9,245 bitcoin utilizing funds from convertible notes and surplus cash.

According to the former CEO, the average price per bitcoin in this acquisition stood at $67,382. Saylor emphasized that MicroStrategy now possesses a grand total of 214,246 bitcoin, equivalent to 1.02% of Bitcoin’s yet-to-be-mined total supply.

As of the latest monitoring by an observer, a significant portion of the hedge fund remains trapped in its short position on MicroStrategy, with short interest hovering around 17.65% of outstanding shares. The price disparity since before the squeeze, ranging from $448 to $1,246, has inflated the cost of covering their positions to an estimated $1-3 billion, depending on their source collateral.

Analysts point out the precarious situation facing the hedge fund, suggesting they must either scramble to acquire shares and call options or resort to selling off other assets to extricate themselves.

Moreover, a contrarian trading idea emerged, advocating for shorting crypto equities while going long on spot crypto. This perspective anticipates a reversal in flow dynamics once ETFs become accessible, as investors pivot from crypto equities to ETFs.

Information for this briefing was found via CoinTelegraph and the sources mentioned. The author has no securities or affiliations related to this organization. Not a recommendation to buy or sell. Always do additional research and consult a professional before purchasing a security. The author holds no licenses.

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