Crowded trade
What happens when one side of a market fills up with the same bet, and exits become hard to make?
In plain words
A crowded trade is a position held by so many participants on the same side that there are few buyers left to absorb selling when they exit. Rising funding rates, heavy volume and one-sided price action are clues, though none is proof on its own.
Why it matters
Crowding does not require prices to fall to hurt. When everyone owns the same side, a small trigger can find no counterparties, so prices gap through stops and slippage widens. Position sizing based on calm-market liquidity can fail exactly when the exit is needed most.
In a real week: ETH, week of 12 April 2021
In the week of 12 April 2021, ETH perpetual funding averaged 0.1044% per eight hours and peaked at 0.2036%, while dollar volume reached 14.08bn, 1.19 times its prior 12-week average. ETH closed at 2235.64, up 3.91%, but ranged 30.9% between 1946.80 and 2548.29. The worst day, 17 April, fell 4.33%, and the largest hourly move was -4.23% at 18 April 03:00 UTC.
A common mistake
Reading high funding or heavy volume as proof of a bubble. They show crowding pressure, not when it unwinds or whether it unwinds at all.