Martin Zweig popularized the phrase “Don’t fight the tape” as a warning to investors not to underestimate the power of momentum, positioning, and liquidity in determining near-term price action.
In the context of crypto markets this week, I believe this point is salient. BTC and ETH have risen about 7% and 20% year-to-date, respectively. However, this week they corrected by roughly 5% for BTC (the third-largest weekly decline in the last twelve months) and 10% for Ethereum (the ninth-largest).
Positioning was the driving factor in this correction. Leveraged long positions had become overcrowded (a bullish sign for long-term appreciation), leaving a fragile market characterized by high funding rates, rising open interest, an elevated long/short ratio, and thin spot liquidity. On Sunday, with BTC around $115,000, more than 400,000 traders began to unwind bullish bets as hopes for a deeper-than-expected interest-rate cut and a more dovish Fed signal faded, triggering approximately $2.6 billion in liquidations.
This selling sparked ETF net outflows. A second wave followed on September 25, as traders rolled or closed positions and dealers hedged more than $22 billion of expiring options (of which $17 billion were BTC-focused). With much of the open interest clustered near the $110,000 strike for BTC, this served as an effective magnet for price going into the September 26 expiry.
Nonetheless, this appears to be a correction of a temporarily over-optimistic market. Fundamentals remain strong, and larger-scale regulatory and institutional adoption continues to move the industry forward. As such, it is best to ignore, however interesting they may be, short-term downward fluctuations and stay true to the longer-term vision that many of us spend our careers and lives supporting.
