By one popular metric, there are signs that the recent resurgence of the second-largest cryptocurrency may be coming to an abrupt halt.
Ether, the cryptocurrency that underpins the Ethereum blockchain, has soared more than 35% since the beginning of the month and is more than 75% off its December 2018 low, but the number of traders betting on future price rises, or going long, has reached dangerous levels, according to data compiled by a popular anonymous online crypto analyst, which uses the Twitter handle @Rptr45.
“Once again $ETH positioning is starting to paint an ugly picture. The L/S [long/short] ratio is 3.22 the upper ~1.5% of all time. What’s notable is levered longs are near ATH [all-time highs]. This compares with $BTC where leverage has largely left Bitfinex altogether, with both L/S in their lower quartiles,” tweeted @Rptr45.
Ether long/short positioning
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With more than three times the people long than short, a move against those in the majority can be amplified, causing sharp declines as a large number of investors try to unwind their positions at the same time.
A short bet is when an investor, usually using borrowed funds, bets that the value of an asset will fall. To initiate a short position, in cryptos, an investor must place a set amount of fiat currency with the exchange as collateral.
Further explaining why long-short positioning can lead to big price swings was Travis Kling, founder and chief investment officer of Ikigai Asset Management: “Historically, offsides shorts that are forced to cover have been fuel for pumps and offsides longs that are forced to sell have been fuel for dumps. When the ratio gets too lopsided one way or another, a large price move typically ensues,” he wrote.
In fact, the last time the ratio was this high was Nov. 11, 2018, which was met with a one-day selloff of 12.3%, extending to a 10-day crash where the price of a single Ether fell 40.4%.
Moreover, this wasn’t a one-off event. In the eight occasions the ratio of longs to shorts has reached such levels the average one-day return was -4.1% and the average 10-day return was -16.8%.
Ether returns when l/s exceeds 3.22
Where would a 40% selloff take us? With a single Ether ETHUSD, +2.61% fetching around $146, a 40% decline would see the coin trade below $90 and a decline of 16.8% — the average 10-day fall when positioning reaches these extremes — would see the price fall to around $121.
Since the beginning of the year, Ether has climbed 38%, outperforming the best-known cryptocurrency, bitcoin, BTCUSD, +1.21% which has gained 14%.
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