Bernstein: Recent Gains in Some Cryptocurrencies Caused by Short Covering

Many of the tokens that have rallied in the last couple of days are the ones that were most shorted, including solana (SOL) and lido (LDO), the report said.

Shorting is a way of betting that a price will decline. An investor borrows a security and sells it in the hope that the price will drop. They then repurchase the security and return it to the lender. The borrower can then pocket the difference if they’re right, or fork out the difference if wrong.

Investors had bet against liquid staking platform Lido on concerns that the next Ethereum upgrade will fail to introduce the scheduled ability to withdraw staked ether (ETH). Solana had declined on fallout from FTX’s collapse, the report added. FTX and sister company Alameda Research held large amounts of solana on their balance sheets.

In the last 24 hours, forced buying by investors who had shorted the tokens – a so-called short squeeze – saw lido gain 21% and solana 24%, the note said. LDO is up 81% this year and SOL 67% while ether has gained 11% and bitcoin (BTC) 5%, Bernstein said.

“Ether strength is all fundamentals,” analysts Gautam Chhugani and Manas Agrawal wrote. “ETH is the apex asset for the new cycle (whenever it commences).”

With the optimism around China reopening, Bernstein notes that bullish investors have been making the case that buying has been led by Asia, rather than the U.S., where sentiment is still muted in the aftermath of FTX.

The broker says this is potentially a “transitory narrative” given that crypto markets are generally more upbeat into the Chinese New Year, which starts Jan. 22.

Read more: First Mover Asia: Altcoin Short Squeeze Brings Green Shoots to Dormant Crypto