Ethereum, the second-largest cryptocurrency by market cap, is under pressure as hedge funds ramp up bearish bets. While the broader crypto market is showing signs of recovery, Ethereum seems stuck in place. Short positions against ETH have surged by 500% since November 2024, reaching record highs, according to The Kobeissi Letter. This level of shorting suggests that big players are betting against Ethereum in a big way.

But why is Ethereum lagging behind while Bitcoin is soaring? And could this extreme bearish positioning trigger a short squeeze? With volatility on the rise and key market forces at play, it’s time to dive deep to understand.

This sudden rise in short positions created ripples in the market, with futures contracts on the CME peaking at 11,341. In just one week, bearish bets jumped over 40%. This strong wave of negative sentiment has impacted Ethereum’s price, which currently hovers around $2,500, down 2% in the last 24 hours and nearly 45% below its all-time high from November 2021. Hedge funds seem to be betting heavily on Ethereum’s price falling further, raising fears about potential market volatility. 

With such extreme short positioning, Ethereum could be at risk of a short squeeze. This happens when short-sellers are forced to buy back ETH to cover their positions, causing prices to rise suddenly. Given the current market setup, sudden price swings – like the February 3rd crash – could become more common.

While Bitcoin has surged over 100% in 2024, Ethereum has gained only 3.5%. This has widened the gap between the two, with Bitcoin’s market cap now six times larger than Ethereum’s – levels last seen in 2020. Ethereum’s slow performance has raised doubts about its long-term outlook compared to Bitcoin.

Meanwhile, altcoins in general are struggling due to delays in regulatory approvals, further strengthening Bitcoin’s dominance.

The aggressive shorting coincided with a sharp Ethereum price drop on February 2, when ETH plunged 37% in just 60 hours following trade policy announcements from the Trump administration. This crash wiped out over $1 trillion from the broader crypto market, drawing comparisons to the 2010 stock market flash crash.

Despite the turmoil, Ethereum has continued to attract capital inflows. In December 2024 alone, ETH saw over $2 billion in investments, including a record-breaking weekly inflow of $854 million. Even support from figures like Eric Trump, who recently called it “a great time to add ETH,” hasn’t been enough to shift the bearish sentiment.

An X user, Lola, pointed out that Ethereum’s high gas fees are hurting Layer-2 network performance. He suggested using SHIB—the largest native token on Ethereum – as a gas token to lower costs. According to Lola, making Ethereum more of a store of value while using SHIB for transactions could help stabilize its price and improve its long-term prospects.

For now, Ethereum remains in a tough spot, struggling to gain momentum against Bitcoin. The heavy short positions suggest more volatility ahead. Unless a strong positive development emerges, ETH may continue facing pressure from both market sentiment and technical challenges.

Short sellers may be in control now, but in crypto, the tide can turn when least expected.