Bitcoin rises as cryptocurrencies try to rebound after major sell-off

Cryptocurrencies rose on Friday following a steep sell-off a day earlier that saw around $150 billion wiped off the market after Russia invaded Ukraine.

Bitcoin was trading about 11% higher at $39,466.84 at 8:49a.m. ET, according to Coindesk data. Bitcoin had fallen as low as $34,338.57 on Thursday. Other digital coins including ether and XRP saw solid gains as well.

Thursday's sell-off was sparked by Russia's invasion of Ukraine that also saw global stocks fall sharply. Bitcoin's price move has more recently correlated closely with other risk assets like stocks, as more institutional investors get involved and short-term investors who trade bitcoin like other risk equities have have entered the market.

A stunning intraday reversal in U.S. stocks on Thursday led major indices to close higher. That positive price movement has filtered through to cryptocurrencies.

But the big cryptocurrency rebound could also be the result of a so-called short squeeze, according to Vijay Ayyar, vice president of corporate development and international at crypto exchange Luno.

"Given, the situation unfolding in Ukraine, market participants generally went short BTC [bitcoin] to protect downside risks. This was defensive positioning essentially," Ayyar said. "What we're seeing now is the market unwinding and shorts closing positions."

When investors go short, they are essentially betting on the price of the cryptocurrency going down.

Traders can short bitcoin by buying a futures contract that bet on a lower price of the cryptocurrency than where it is trading when they purchase that contract. These usually have an expiry date at which they're sold.

Also, cryptocurrency exchanges offer traders products that allow them to buy bitcoin via contracts that don't have an expiry date. These are called perpetual contracts.

A trader betting that the price of bitcoin will go lower would sell a contract with the hope that it drops so they can buy it back at a lower price and pocket the difference. If the price of the contract goes higher and a trade closes out their position, then they have to buy that contract back at a higher price.

That can push the bitcoin price higher, resulting in a short squeeze.

That trader may also borrow so they don't have to put in 100% of the money that the contract is worth. But they need to constantly fund the position to keep it open with a minimum amount of money. When that minimum amount cannot be funded, an exchange may close that position. Or traders may close their short positions themselves.

Ayyar said that this is the main driver at the moment for the move higher in bitcoin and other cryptocurrencies.