Bitcoin, Ether, Ripple, and other currencies continue to plummet for the second-consecutive week—threatening critical support levels which seem likely to spark bigger declines.
Our IG Client Sentiment continues to warn that holdings remain remarkably one-sided in the cryptocurrency space. According to IG order books, a remarkable 72 percent of traders with open positions are long Bitcoin, 96 percent are long Ripple (XRP), 89 percent are long Ether (ETH), and 85 percent are long Litecoin (LTC). We have historically used such sentiment extremes as a clear contrarian signal—if everyone is long we prefer to sell and vice versa.
And yet it is critical to highlight that cryptocurrency traders have thus far held onto these Bitcoin, Ether, and other cryptocurrencies with virtually no respite. This muddies our analysis of IG Client Sentiment since it is clear that a passionate core of traders seem intent on holding (or HODLing) Bitcoin, Ether, Ripple, and others as long as possible. How do we ultimately use this information in our analysis?
Bitcoin Positioning Warns of Continued Weakness as Majority of Traders Continue to Buy
Data source: IG Client Sentiment as shown on DailyFX.com
Without clear precedent we need to fall back on what we know historically to be true: if everyone has bought there is no one left to buy. It is certainly possible—if not likely—that cryptocurrencies will rebound after posting dramatic declines. And yet the long-term picture of such heavily one-sided sentiment is worrying.
Current Bitcoin and Ether traders can continue to HODL, but unless new money comes in and bids prices higher we might expect major cryptocurrencies to continue their recent tumbles. Given the recent pace of violent declines we view such near-term capitulation as relatively unlikely.
As long as traders continue to hoard and remain heavily net-long Bitcoin and other major cryptocurrencies, our view of sentiment will call for further crypto weakness.
Why and how do we use IG Client Sentiment in trading? See our guide and real-time data.
--- Written by David Rodriguez, Senior Strategist for DailyFX.com
Contact David via the comments section below as well as Twitter at http://www.twitter.com/DRodriguezFX