How a $42M Profit Turned Into a $5M Loss in 18 Days

loracle.hl was far from the only victim. By late May, other short sellers had been badly burned. One whale who opened a HYPE short position in late April borrowed five times their capital to short $30 million worth of the token and exited after 23 days with a $23.5 million loss . Another trader was sitting on $22 million in unrealized losses by late May and refusing to close—a position that would only deepen the squeeze if HYPE kept rising .

Why HYPE Keeps Punishing Shorts: Four Structural Mechanisms

The loracle.hl liquidation wasn't just bad timing. It was the result of several structural market mechanisms that together create a uniquely hostile environment for short sellers.

1. The Assistance Fund: An Automated, Continuous Buyback Engine

The most important mechanism propping up HYPE's price is the Assistance Fund. Hyperliquid routes approximately 97% of all protocol trading fees into this on-chain pool, which then performs automated, programmatic open-market purchases of HYPE . This isn't a discretionary buyback program a team can turn on and off—it runs continuously.

The scale is enormous. Since launch, the Assistance Fund has spent more than $1.3 billion on HYPE buybacks, running at roughly $1 million per day—an annualized rate of approximately 7% of the token's market cap . Every trade on Hyperliquid, regardless of market sentiment, generates mechanical buy pressure on HYPE. This is a structural deflationary force that directly counters any short seller hoping for price declines .

A December 2025 governance vote, passed by roughly 85% of validators, pushed the allocation even higher—toward 99% for certain fee categories—and committed to permanent burns on a portion of the Fund's holdings .

2. Negative Funding Rates: The Short Squeeze Accelerant

Perpetual futures contracts use funding rates to keep the contract price aligned with the spot price. When funding rates are negative, short traders pay longs to maintain their positions. In theory, this should discourage shorting. In practice, during May 2026, it attracted more bears.

On-chain analytics firm Santiment and derivative data platform CoinGlass both reported severely negative funding rates across exchanges during May 18 and 19, 2026. This pattern indicated that large numbers of traders were opening short positions betting on a pullback . Instead, HYPE kept climbing. Those bearish traders were then forced to buy back their positions as they got margin-called, adding upward price pressure that squeezed out even more shorts .

On May 18 alone, short liquidations exceeded $30.6 million in 24 hours, while HYPE open interest hit $2.5 billion . By late May, derivatives data showed record open interest of $3.5 billion, with over $126 million in short liquidations since May 20 .

Hyperliquid's funding rate engine, which samples the order book every five seconds and averages the premium across the hour, ensures that these payment flows are continuous and precise . When shorts pile in, the cost of holding those positions compounds daily—until the price moves and the liquidations begin.

3. ETF and Institutional Inflows

A third structural pillar supporting HYPE is the arrival of institutional money through newly launched exchange-traded funds, including products like the Bitwise HYPE ETF. These ETFs, combined with growing recognition of Hyperliquid as a revenue-generating blockchain, have created a second layer of persistent buying demand that doesn't care about technical analysis or short positioning .

Analysts have noted that the rally depends heavily on sustained ETF demand and avoiding crowded futures positioning—both factors that were working in HYPE's favor during late May 2026 .

4. The Short Squeeze Feedback Loop

These three forces—automated buybacks, negative funding rates, and institutional inflows—don't just coexist. They interact to create a powerful acceleration loop:

Traders open shorts → funding rates go deeply negative → longs get paid to hold → HYPE price grinds higher from ETF inflows and buybacks → leveraged shorts get margin-called → forced buy-to-cover adds yet more buying pressure → price moves higher still → more shorts get liquidated .

The result, as one analyst described it, is that "deeply negative funding rates failed to cool HYPE, turning crowded bearish bets into fuel" for the rally . By late May 2026, a separate whale refusing to close a $22 million unrealized loss in a 5x cross-margin short on 1.80 million HYPE tokens was sitting on a notional position worth over $102 million—representing another wave of forced buying if the rally continued .

The Real Risk: Token Unlock Overhang

For all the bullish structural forces supporting HYPE, the token faces one risk that could overwhelm the buyback engine and reward patient short sellers: the massive disconnect between circulating supply and total supply.

Only approximately 222.45 million HYPE tokens out of a total supply of about 955.31 million are currently circulating, creating a dilution ratio of roughly 4.3x . This means that roughly 75% of all HYPE tokens that will eventually exist are not yet in the market—and they will be unlocked on predictable schedules stretching through 2026 and beyond.

The unlock mechanism is complex. Core contributors control about 23.8% of the total supply, locked under a one-year cliff followed by linear vesting through 2027 . There is also a 38.888% allocation for future community emissions .

The scale is what's concerning. One analysis found that at a January 2026 snapshot, unlock value of approximately $219 million exceeded protocol buyback capacity of roughly $49 million by a ratio of 4:1 . In April 2026, an unlock of roughly 9.92 million HYPE tokens worth between $316 million and $375 million hit the market .

There is an important nuance. Research from Tokenomist found that announced claims have been far smaller than projected ceilings. For April 2026, the announced claim from the Hyper Foundation was approximately 330,000 HYPE tokens worth roughly $12.1 million, compared to the whitepaper ceiling of 9.9 million tokens worth about $364 million—a roughly 30x difference . For five consecutive months, the actual supply pressure from unlocks was overstated by 30–57x relative to what observers expected .

So the unlock risk is real, but it is not as straightforward as the top-line numbers suggest. The announced distributions have been much smaller, and Hyperliquid has also reduced team unlocks—cutting them by roughly 90% from 1.2 million to 140,000 tokens in early 2026 to stabilize prices .

The Assistance Fund's buyback capacity is dynamic. On April 9, 2026, Hyperliquid recorded net deflation in HYPE supply: the protocol bought back 42,446 HYPE tokens at an average price of $39.38 while distributing 26,783 tokens to validators and stakers, resulting in a net reduction of 15,663 tokens . Whether this holds as larger tranches vest will depend entirely on whether trading volume—and therefore fee revenue—stays high.

Other Risks to the Rally

Beyond token unlocks, several other factors could shift the balance against HYPE and give short sellers an opening.

Revenue cyclicality: The buyback engine depends on sustained high trading volumes. If trading activity drops because of competition from centralized exchanges or other DEXs, or if crypto markets broadly decline, the buyback pressure weakens precisely when short sellers might try to re-enter .

Regulatory exposure: Hyperliquid faces increased regulatory risk as it moves into traditional finance products and cross-jurisdiction operations. Any adverse action from the CFTC or SEC could hit HYPE's price .

Technical exhaustion signals: By late May 2026, several analysts flagged potential bearish divergences. The RSI was diverging from price on the 12-hour chart, the Chaikin Money Flow indicator showed weakening capital support despite rising prices, and HYPE was sitting near resistance just below its old all-time high near $59, raising the risk of a 20% pullback toward the $51.5 to $45 support zone .

These signals don't guarantee a crash, but they do mean that the rally may be running on borrowed time—and that short sellers who manage their risk carefully and survive the squeeze could eventually find themselves on the right side of the trade.