I've developed a pretty interesting trade idea and figured some may find it useful. I understand this is a Bitcoin sub, but half the trade is BTC, so I think it's relevant.
First of all, I recommend any trader to bookmark this site, it contains incredibly useful information about the sentiment of BTC, expressed through the margin short/long positions in Bitcoin (and a few other coins).
It's useful as a contrary indicator. I.e. when there are too many margin longs, I take that as a sign of (short term) irrational exuberance and I tend to move to a bearish (again, short term) outlook and look for places to short. Vice versa, when the ratio skews towards much more shorts, I start to think about going long. It's not super accurate as a stand alone tool (just because markets are irrationally bullish/bearish doesn't mean they won't get more irrational bullish/bearish in the short term). Generally, the ratios are never more skewed then they are now in BTC (i.e. tends to oscillate something in range of 60/40-40/60 etc). I don't trade other coins much, so hadn't looked at the other ones, but just for a laugh I looked at the short/long interest of ETH/BTC and we see this:
This is way, way out of whack. Currently, the long/short ratio sits at around 90/10 in favor of longs. That's not sustainable. As anybody whose been around markets for a while knows, whenever one side of a trade gets too crowded, powerful contrary price action very often follows. And long ETH/BTC is pretty damn crowded.
Intuitively, this makes sense. Remember, every margin long is a borrowed coin, and those longs MUST sell in order to close their trade. So looking at the ratios, we see that 1 million+ ETH must (at some point) be sold, compared to only 128,000 ETH short's that must be bought. Most alarming for ETH longs, price has been falling DESPITE the massive margin buying. This suggests that not only is one side of the trade overly crowded, there have been more sellers then buyers DESPITE the building up of this massive long position. Now you've got a situation where 1 million+ longs are mostly underwater, probably held by nervous traders watching price go lower and lower. There will be a tipping point, it could be tomorrow or it could be months, but it will happen, where price falls and a critical mass of longs throw in the towel that it falls hard, starting a panic selling that will only reverse once capitulation happens. This type of move could easilyh result in 30-40%+ losses in a day or two. It should be noted that the long position has a market value of just under $300 million, which represents almost an entire days worth of global ETH trading. That's crazy. By comparison, the total long position in BTC/USD (a market almost 700% bigger) is currently sitting at around $121 million. A long position of that size relative to the overall market simply cannot be closed without massively crashing price, unless it's done over many weeks and months slowly. And of course, we all know that the fear that happens during these sorts of capitulation events precludes any sort of rational, level headed decision making. When the panic hits, these longs are going to sell regardless of price.
Now, what are the risks to this trade? Well, the biggest issue I can see is that it's not like long positions in ETH/BTC just happened. If we zoom out on the chart above, we can see that the trade has skewed heavily long for almost a year now. But all that suggests to me is that a capitulation event is not necessarily imminent, and it may take some weeks or even months before the crash happens. But with such a massive long position (especially in the face of falling prices) acts as a built in safety net for the trade. While we cannot be sure when the capitulation event occurs, we can be reasonably sure that, until the long/short ratio comes way down, a sustained rally will probably never occur, which gives us confidence that our short position won't quickly turn ugly against us. The risk/reward on this trade skews heavily towards the reward side. Why? Because with such a huge long position open (most of it underwater and owned by increasingly nervous longs watching price fall day after day) any short term spikes will likely be quickly sold into by anxious longs trying to get out of the trade.
We can see this exact dynamic as the large, brief spike that occurred on the 24th of October (above)has been quickly sold into. The price jumped about 18% in an hour, a pretty major spike. Normally, a spike of this size would then see follow on buying occur. This didn't happen, as the spike was sold into immediately. At the same time, long positions dropped by about 10,000 coins from the top of the spike to right now, which suggests exactly as I said above: any spikes will be quickly attacked by longs. While we cannot be sure when the capitulation event occurs, we can be reasonably secure that no rally will occur before that happens, thus allowing us the patience to enter our shorts and wait it out. I do not believe that any sustained rally can happen until the long/short ratio comes way, way down. Any brief spikes (such as the October 24th spike) can be used to add to our short.
You know in the cartoons where the coyote runs off a cliff but never falls until he looks down and realizes where he is? That's where the ETH/BTC market is right now. It's already ran off the cliff, now we just wait for a critical mass of those longs to look down and start the chain reaction that will end in a huge correction in the ETH/BTC price.
Some might ask why would a trader give away a promising trade? The answer is simple: I've already fully entered into my short position, so now I'm trying to hasten the capitulation event I'm betting on by making the precarious position ETH is in more widely known. I would never recommend anybody enter a trade based on what some guy on the internet says, but do your own research, and if you come to the same conclusions as me, by all means, enter your short and then do the same.
And if some numbskull gives you shit about trying to "crash" ETH, explain to them that it's not your job to protect people from shitty trades. They should have done more research and known not to enter a trade where so many are on one side. Also, it may be worth pointing out the crucial role shorts play in the price discovery of any market, as well as the soft landing shorts will provide. When the capitulation event happens, shorters closing their trades will likely be the only buyers in the market, thus preventing a much more severe downturn.
Edit to add: While I make it abundantly clear that trying to time such a selling event is both impossible and unnecessary, I would keep a close eye on the 0.047 level (basically the 6 month low). If price retests that level, and fails to hold, watch out.
Double edit: I want to make it clear, I'm not arguing the merits or long term potential of Etherium. I have no position on that. I'm not betting AGAINST Etherium. I'm betting ON human psychology, which is much more predictable then any security could ever be.