Bitcoin: The Next Reddit Short Squeeze

Users of a social media messaging board suddenly emerged as a market moving force last week. Reddit users have been deploying a clever tactic to push individual stocks to record highs. Now, their next target could be the world’s most popular digital asset — Bitcoin. 

Even if you’re uninterested in the Reddit short-squeeze saga or the rise of Bitcoin, here’s what you need to know about this emerging trend that’s reshaping the financial sector. 

Reddit short squeezes

Retail investors have been working together to target specific stocks that are heavily shorted by institutional investors. This strategy — known as a “short squeeze” — has the potential to drive stock prices up with breathtaking velocity. This is why stocks like BlackBerry jumped as much as 40% on a single day last week. 

With over seven million members, Reddit’s investor messaging boards collectively have as much capital and power as any mid-sized hedge fund. Needless to say, this is a force to reckon with if you’re an investor. 

The Reddit army’s strategy hinges one key metric — short interest. The more heavily shorted a stock, the higher the chances of a successful short squeeze that unlocks value for Reddit investors. 

It now looks like hedge funds and institutional investors are shorting Bitcoin. 

Bitcoin could be the next target

Data from crypto news publisher The Block indicates that hedge funds and institutions have collectively bet US$1 billion (CA$1.28 billion) against Bitcoin. As the price of Bitcoin rises, short interest seems to be increasing. This means the cryptocurrency could become an ideal short-squeeze target for Reddit users.

Reddit users have another reason to target Bitcoin: decentralization. Last week, major stock trading platforms such as Robinhood prevented users from buying these so-called meme stocks on Reddit’s radar. This intervention cost many Reddit users millions in lost value. In other words, the rules of the game were changed by the gatekeepers just as retail investors were winning. 

Bitcoin, however, cannot be restricted like this. It’s a global decentralized network that can be bought and sold without the need for gatekeepers. That enhances its appeal as a Reddit short-squeeze, long-hold target. 

Betting on Bitcoin

Canadian investors can buy Bitcoin directly on trading platforms like Wealthsimple. However, there are plenty of other options for investors who don’t want direct exposure to BTC. 

The Bitcoin Fund (TSX: QBTC.U) is probably the best proxy for retail investors. This exchange-traded fund (ETF) trades on the Toronto Stock Exchange like any regular stock. Each unit of the ETF represents 0.001116 BTC. So, when the price of BTC rises, this ETF should track that performance. 

Why is the ETF better than holding BTC directly? For one, the ETF is regulated by Canadian financial authorities. This means you have an added layer of safety with your investment. 

The ETF also qualifies for your Tax-Free Savings Account (TFSA). That’s probably a better reason to buy the ETF instead of BTC directly. 

Bottom line

Reddit users could target Bitcoin as hedge funds ramp up short bets against the cryptocurrency. Keep an eye on the Bitcoin Fund.