For every bounce up that follows a steep fall, bitcoin investors are seemingly returning to optimism.
Data from a DailyFX research note shows that 80% of traders with a position in bitcoin are on the long side – meaning they have positioned themselves for higher prices. According to Marketwatch, this is the highest level of optimism among bitcoin traders since November 2018.
According to research analyst Fan Xu at DailyFX, this gives a long-to-short ratio – the ratio between those who are betting on higher prices and those who are betting on lower prices – of 3.44 to 1.
There are a few possible reasons for this, but most of all it appears to be a result of renewed optimism after bitcoin and other major coins have surged since mid-December. For ether, the native cryptocurrency of the Ethereum platform, the surge has been particularly strong with a gain of almost 90% since its low on December 14. Bitcoin, on its end, has recorded a gain of roughly 20% since its mid-December low.
Bitcoin price chart:
A long-squeeze looming?
Assuming the trading data from DailyFX is correct, it would mean that the long side of the bitcoin trade is now getting quite “crowded,” with a very large number of traders expecting that prices will move higher.
The danger then, is that these traders will be forced to sell if things do not turn out the way they expected. This situation is often characterized as a “long squeeze,” as opposed to the typical “short squeezes” we have seen so many times in bitcoin this year.
What is going to happen this time is of course impossible to tell with certainty, but according to DailyFX’s analyst, traders should be wary:
“We typically take a contrarian view to crowd sentiment, and the fact traders are net-long suggests bitcoin prices may continue to fall. Traders are further net-long than yesterday and last week, and the combination of current sentiment and recent changes gives us a stronger bitcoin-bearish contrarian trading bias,” she wrote.