Here’s Why Shorting Bitcoin Will Never Work

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Careful what you wish for. Many are rejoicing at the astronomical gains from Bitcoin and other cryptocurrencies in the past year. But others see the rise and hype surrounding Bitcoin, undoubtedly the most well-known option in the digital currency world, as the shining example of a price mania that’s destined to correct hard.

An increasingly common strategy for those skeptical of Bitcoin and its overall validity in the financial world is to short it. Talk of shorting Bitcoin has only increased due to the launch of Bitcoin futures in early December by the Chicago Board Options Exchange (CBOE) and CME Group (CME).

Photo: CNBC

Futures would seemingly make it much easier to short the cryptocurrency because it lets investors buy and sell a lot more since there’s no need to own actual Bitcoin. Before the futures, the only way to short was primarily through expensive platforms like Grayscale Investment’s Bitcoin Trust (GBTC).

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Even though the first day of futures trading for CBOE was somewhat tepid, it’s still a bad idea to short Bitcoin.

First on the list of reasons is the cryptocurrency’s public perception and purchasing methodology. A lot of the buying patterns seem to mimic cup and handle breakouts. People are rushing to buy Bitcoin at each dip because there’s a mindset that it’s at the ‘last low price.’

Until this changes, there’s a good chance the price is going to keep shooting up. And even if there was a hard crash, it might drop so quickly and far that it would be really hard to even get in a position to short.

Add in the potential of a trading halt (like what was seen at CBOE last week), and those looking to short could literally see themselves stuck in a bad position. Plus, the high margin requirements for futures can make things quite costly even if you come out ahead. Those using GBTC for new shorts are being charged 18.5% due to a small overall float.

Plus, GBTC interest and borrowing costs are said to have the potential to reach up to 50% annually as more and more Bitcoin futures and ETFs hit the market. Ihor Dusaniwsky of S3 Partners LLC said many of those who used GBTC to short are facing huge losses.

Photo: QZ.com

Nassim Nicholas Talib also pointed out in a December 10th tweet that “there is NO way to properly short the bitcoin “bubble”” because there needs to be a “very, very deep market” for “Futures that don’t have deliverables.”

There’s another potential problem for those who decide to short. Since the number of Bitcoin is limited, a short squeeze could develop if hedge funds (for example) rush to buy Bitcoins or take opposing futures contracts in case their price bet fails.  

There’s also speculation that Bitcoin prices are generally moving parabolic. If this trend is true, then the cryptocurrency is set to keep rising at this point. One of the suggested reasons is due to a recent price breakout by Ethereum, which has been in a triangle pattern for the past few months.

When the price either breaks above the resistance level or falls below the support level in a triangle pattern, it’s usually a strong trend that it will continue in that direction. Ethereum’s been rising in recent weeks, and it broke out above the resistance level in late November.

Photo: Finance Magnates

This suggests a bullish trend for the future. And theoretically, higher Ethereum prices mean the cryptocurrency market is going to stay strong. Especially for Bitcoin. Plus, Bitcoin’s impulse and consolidation waves over the past couple years also seem to suggest a parabolic trend. Both of these factors make the prospects of shorting Bitcoin pretty tough.

So if you’re looking to strike it rich with cryptocurrencies, don’t fall for the hype. Shorting Bitcoin won’t work.

  • You can’t short it in the markets but you can avoid the train wreck that’s coming. The more valuable it gets, the more restricted the ability to mine and purchase or trade for it is. Currently we’re very close the point at which only state actors have the ability to mine and hoard new bitcoins, especially given that governments can do what no individual can, which is print money. Once a handful of governments corner the market it will no longer be widely used in actual transactions, at which point it is no longer a currency and simply a legacy good, or status symbol, like gold and silver, only without any tangible existence. I still believe that currencies, or means of transaction, that exist outside of the JWO’s central banking SWIFT cabal are the future, but don’t bet it all on just one alternative.

    • Kevin O’Brien

      Fair points!

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  • Michael Kowalik

    Bullish trend for the future?! Are you not concerned that bitcoin is being de-anonymised following the court order in IRS V COINBASE?: http://culturalanalysis.net/2017/12/15/bitcoin-de-anonymisation-and-the-block-chaingang/