The main catalyst behind the sudden spike in the XRP price seems to be a short squeeze. According to data from Bybt.com, $96 million worth of XRP futures contracts were liquidated in the last 12 hours.
Why did the XRP price see a short squeeze?
On December 29, Coinbase suspended the trading of XRP on its platform, following the path of other major exchanges, like Bitstamp.
Paul Grewal, the chief legal officer at Coinbase, wrote:
“In light of the SEC’s lawsuit against Ripple Labs, Inc, we have made the decision to suspend the XRP trading pairs on our platform… The trading suspension will not affect customers’ access to XRP wallets which will remain available for deposit and withdraw functionality after the trading suspension.”
Coinbase suspending XRP trading established a precedent for the entire cryptoexchange market, possibly leaving major implications for the cryptocurrency.
With the risk of additional exchange delistings and suspension, the market began to overwhelmingly sell and short XRP.
However, when an asset gets overly shorted, the probability of a short squeeze increases.
A short squeeze occurs when short-sellers borrow capital to sell an asset with leverage and are forced to buy back their positions if the price of the asset increases.
The $96 million XRP futures liquidation within merely 12 hours clearly shows that a short squeeze materialized.
Some technical analysts predicted such a move. Mayne, a cryptocurrency trader, said:
“Down double digit % pts in a day, entire feed short say it’s going to 0, price dumped into HTF support, easy punt. SEC crushing XRP would be bad for the space as a whole IMO but for now it’s risk specific to Ripple. That said, I don’t care play the chart and sentiment.”
In the near term, XRP faces strong resistance levels at $0.24 and $0.26 as the momentum of the short squeeze dwindles.
What happens next?
Analysts expect the U.S. Securities and Exchange Commission (SEC)’s lawsuit against Ripple to apply more pressure on other tokens.
In the medium term, this could mean that the SEC could look into filing additional complaints against other crypto companies and potentially blockchain projects, which would place immense pressure on alternative cryptocurrencies.