The contrarian viewpoint says to do what other people are not doing. So if they zig, you want to zag. And in the case of Bitcoin, if they are shorting the world’s largest cryptocurrency, contrarian wisdom says you should go long.
Is that actually true, and does it work?
Well, first of all, let’s consider that even with a large amount of short interest, bitcoin has remained in a tight range for over two months.
And the break from that range came on November 14, 2018 just as short interest had dropped significantly.
Leading up to the recent drop in price everyone had been talking about the high levels of shorts, which was nearly 38,000 BTC as of mid-October 2018. And that had everyone speculating that a short squeeze similar to the one seen in late August/early September 2018 was coming. That meant there were a lot of long-stop limit orders just waiting for the short squeeze.
The problem with this is that when everyone is going in the same direction in a trade it becomes a crowded trade, and this creates additional risk that the trade will move the “wrong way”. And that is precisely what we saw happen with Bitcoin. Even as the number of shorts decreased, and the longs were increasing, price unexpectedly declined.
The lesson here is to avoid following the crowd when trading. Do your own analysis and include all of the available data you can get your hands on. If you had been watching short interest you would see it had been falling sharply in October, and you would also see that even though there was a jump in price following the August jump in short interest, there wasn’t the same response in September.