I've often wondered why there weren't more short markets available
|Jul 10||Public post|
Over the last year, I've often found myself wondering "how do I short ___?" Usually this happens when I'm researching this or that and find an asset that seems artificially high priced compared to its "peers."
Grin in January 2019 released to much hype plus a high emission rate which would mean high and continuous selling pressure
BitcoinSV in June 2019 pumped hundreds of percent without reason. Meanwhile, its figurehead Craig Wright was galavanting across the world sueing people for saying he wasn't Satoshi--a claim that he'd likely be unable to prove in court
Alogrand in June 2019 was auctioned off at ~50x the price seed investors paid. This high price was in part due to a novel "90% refund guarantee" mechanic that capped the downside for auction buyers. This created many natural sellers but few natural buyers.
In each case, there's a force that should push the price down over some period of time (natural sellers) that outweighs the force that would push the price up (natural buyers).
It is fun and relatively easy to find assets that fit this bill. Because the price of digital assets are largely disocciated with any intrinsic value, overpriced coins are plentiful.
However, you can be right about the physics of a coin (natural direction is down or up) but still lose money if the market behaves irrationally (as it has in the past). But in this BTC dominated market cycle, the risk that an altcoin will erratically pump 25%, liquidating your position is lower.
Still, I've come to realize that in this environment, shorting is still not a great strategy.
Imagine that BTC goes up a lot and ALT stays flat. By and large, this is how the market has behaved over the last six months.
BTC up 100% against USD
ALT flat against USD, down 50% against BTC
If you long BTC, you earn a 100% return. But if you short ALT against BTC (the other side of the same coin), you earn a 50% return. Even if ALT went down 50% against USD, you'd have only yielded 75% on your short.
But what about longing BTC and using that as collateral for your ALTBTC short? Now you're up 150% (100% + 50%), the equivalent of using 1.5x margin on your BTC long.
The unintuitive thing is: if you have strong conviction that BTC will go up and ALTBTC will go down, it's probably best to just margin long BTC, because you're borrowing less and participating in a more liquid market (minimizing the risk of erratic behaviors that wipe out your positions).
But what about hedging? Does 1x long BTC and 1x short ALT minimize your risk? Possibly. If the whole market starts to tank, then you may lose money on your BTC long but make some of it back on the ALTBTC short. This was a good position in 2018 for e.g. Long BTC, short ETHBTC. At the time, ALTBTC prices were very high (BTC dominance was low). A similar position today feels more risky because it's possible that if BTC goes down, alts will go up.
Anyways, I'm not a trader and this is not trading advice. I'm making a simple observation that in a market cycle like ours, shorting isn't a great strategy. Moreover, short markets don't exist for most of the middle and long tail of coins. And even for the coins for which markets do exist, liquidity is low and borrow rates can be high--minimizing your upside and increasing your risk.
Altogether, this means there are fewer markets available for natural sellers of these assets. If there were better reasons and safer ways to short assets, more people would, which would likely drive prices down. So I'm very curious how Binance's margin markets will impact the overall ecosystem. Some have speculated that it will boost the prices of altcoins. If short markets are available for all the coins, it might do the opposite.