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 last rose 1.6% to $39,065.00, according to Coin Metrics. Earlier in the day the cryptocurrency had jumped as much as 11% over the previous 24 hours, after falling as low as $34,338.57 on Thursday. Ether rose 2.1% to $2,709.22.
Thursday's sell-off was sparked by Russia's invasion of Ukraine that also saw global stocks fall sharply. For several months, bitcoin has been correlated 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.
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The sharp drop was a reminder that "in a crisis, all correlations go to 1," Noelle Acheson, head of market insights at Genesis, told CNBC, adding that it reinforced bitcoin's risk asset characteristics. Meanwhile, the bounce shows the longer-term investors "have been waiting in the wings to buy the dip" and that risk traders are now betting things "won't be as bad as they looked at first light," she said.
"On the markets, we've known for some time that a big move was coming — this usually happens after periods of consolidation, and activity in the options market was pointing to this also — but we didn't know in which direction," Acheson said. "Now we know: both."
The 60-day correlation between bitcoin and the S&P 500 reached its all-time high on Wednesday, according to Acheson said.
"The correlation has been over 0.5 on two other occasions, and each time reverted back to lower levels," she added. "It is likely that we see the same again, as risk investors cede price-setting ground to longer-term investors who see bitcoin as an insurance asset in times of geopolitical uncertainty, currency turmoil and inflation. What we don't know is when this will happen."
A stunning intraday reversal in U.S. stocks on Thursday and throughout the trading session Friday led major indices to close higher. That positive price movement filtered through to cryptocurrencies.
A big short squeeze
The cryptocurrency rebound is also in large part the result of a so-called short squeeze.
On Thursday, about 73% of bitcoin futures traders held short positions, according to data from Glassnode. Since then, more than $180 million worth of liquidations has occurred, and sentiment has shifted bullish, Leah Wald, Valkyrie Funds CEO, told CNBC. Options were set to expire Friday.
"Given, the situation unfolding in Ukraine, market participants generally went short bitcoin to protect downside risks. This was defensive positioning essentially," said Vijay Ayyar, vice president of corporate development and international at crypto exchange Luno. "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.
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 trader 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.
"This momentum appears to have legs, and should continue at least through the weekend, barring a dramatic further downturn in the Ukraine or some other black swan event," Wald said.