[header date=”11 December 2018″]How to benefit from cryptocurrency’s decline, trying to predict a bottom for the bitcoin price, and Venezuela’s plans for crypto-linked sales of crude oil.[/header]
A short guide to shorting bitcoin
Just when it seemed like the battering was over, bitcoin swooned again. At the start of last week, bitcoin was trading for $4,100. Now it’s trading for around $3,400—a 17% drop—and it’s dragging the rest of the crypto market down with it. For now, the bulls are in hiding, and the bears are roaring. Each price plunge, deep or shallow, thrusts bitcoin holders into further despair and emboldens the nocoiner chants.
If you’ve thrown in the towel and now feel assured by bitcoin’s capitulation, there are ways to bet on its continued descent. I’d offer a word of caution, however, as investing in bitcoin’s decline can burn speculators even worse than betting on its rise.
Betting against—or shorting—bitcoin is almost identical to shorting a stock, in which you borrow the shares, immediately sell them, and then buy them back later at a lower price to return to the lender.
Take note: The easiest way to short bitcoin is also the riskiest.
In the cryptocurrency world, margin-trading platforms like BitMEX allow traders to borrow against their bets and control positions up to 100 times the size of their stake. If an investor can buy $100 of bitcoin, through BitMEX they’re able to bet on a $10,000 position. This means their gains—and losses—are multiplied. So, a 5% move, which would normally equate to a $5 shift, would instead cause a $500 gain or loss.
Imagine the same exercise with larger numbers, and it becomes clear that short selling with borrowed money is not for the faint of heart. Speculators can quickly end up owing far more money to the exchange than they wagered in the first place.
For those who aren’t investment daredevils, there are other ways to bet against bitcoin. In May, after Microsoft CEO Bill Gates said he would short bitcoin “if there was an easy way” to do it, Tyler Winklevoss—cofounder of the Gemini cryptocurrency exchange—tweeted to explain that he could short bitcoin by shorting XBT, a Cboe-listed futures contract linked to the price of bitcoin.
If you’re well-versed in financial derivatives, binary options and contracts-for-differences are also options. But these products have been notoriously unkind to retail buyers (paywall), regardless of whether they’re linked to bitcoin or another asset.
If you’re more comfortable in the equities market, you have a few openings. For instance, last December, activist short-seller Andrew Left disclosed some of his bitcoin strategy, telling CNBC he bet against the Bitcoin Investment Trust (GBTC), an over-the-counter investment vehicle tied to the price of bitcoin. He noted, though, that finding GBTC shares to borrow was very difficult. Left also discussed shorting strategies for shares in Riot Blockchain and Longfin, two companies whose market caps briefly exploded after tenuous blockchain-related announcements.
Today, there are fewer opportunities for straightforward, negative bets against cryptocurrency through the equity markets. Recent pullbacks have even wiped away opportunities to short companies that manufacture graphics cards, which were in high demand during the crypto-mining craze. Still, if you’re a bitcoin bear willing to put your money where your mouth is, there are plenty of financial products for betting against crypto, if you can stomach the risks. —Matthew De Silva
[supplemental headline=”Market chatter: Look out below”]
[img src=”https://cms.qz.com/wp-content/uploads/2018/12/atlas_rJjd4xak4@2x-2.png”]
Crypto winter is here. Bitcoin has dropped about 50% in the past six months, and other digital assets have fallen even more, with ether declining 85% over the same period.
Bobby Cho, head of OTC trading at Cumberland, a unit of proprietary trading firm DRW, said trading flows have been “heavily skewed towards” bitcoin, making up some 70% of the firm’s transactions. Historically, the company’s trading volume has been more evenly distributed between bitcoin and ether. “We are continuing to see selling pressure from investors looking to lock in any end of year tax losses,” he added.
US regulators haven’t helped matters. The Securities and Exchange Commission foiled hopes that a bitcoin exchange-traded fund would be approved by the end of the year. On Dec. 6, SEC officials pushed back the decision on whether to approve a proposed ETF from SolidX Partners and asset manager Van Eck Associates to late February next year. US watchdogs are wary of approving an ETF when crypto exchanges are vulnerable to manipulation.
Bottom line: In other markets with a sizable and diverse investor base, buyers with a range of views and investing horizons (that is, institutional money) can step in to find bargains during a bear market. Crypto, however, remains primarily a retail market, and anyone hoping for a bitcoin ETF to help resurrect retail demand will have to go on waiting.
[/supplemental]
Venezuela’s crypto chimera
[img src=”https://cms.qz.com/wp-content/uploads/2018/12/Nicolas-Maduro.jpg?quality=80&strip=all”]
Since Venezuela’s president Nicolás Maduro first announced the petro—a sovereign cryptocurrency backed by oil revenues—in Dec. 2017, there has been little evidence of progress from the Venezuelan government.
Revenue from oil production has faltered, resulting in severe food and medicine shortages. Inflation is nearing 300,000% annually, per Bloomberg’s Cafe Con Leche Index, which measures hyperinflation using the price of a cup of coffee.
This past week, though, Maduro ordered two major changes. First, he mandated a 150% increase in the monthly minimum wage. Second, he changed the peg between the bolivar and the petro. Previously, the petro was 3,600 bolivars. Now, it costs 9,000.
This week, state media also reported (link in Spanish) that by March 2019 the Venezuelan government intends to sell crude oil using the petro in an effort to undercut the global dominance of the US dollar. “In 2019, we have a plan to sell [oil] in petros and in that manner, we will free ourselves from a money used by Washington elite,” declared Maduro.
It remains unclear whether the petro is operational in any meaningful fashion. Near the end of October, Venezuela’s vice president for the economy announced it could be purchased through a governmental portal. (I haven’t tested this for fear of violating US sanctions.)
Regardless, the petro block explorer maintained by Venezuela’s official crypto agency claims the digital asset has about 4,200 blocks and 39 connections, which seem to be nodes of some sort. The petro is supposedly on the NEM blockchain, not ethereum as the Venezuelan government initially planned, but its connection to NEM, which has been around since 2015, isn’t immediately apparent.
Even if the petro works exactly as designed, it looks like a convoluted attempt to sell Venezuelan oil for other cryptocurrencies like bitcoin and litecoin. And, of course, any buyers would have to rely the Venezuelan government’s promise to deliver the digital goods—a slippery prospect at best. —Matthew De Silva
[supplemental headline=”De-jargonizer: JOMO”]
JOMO is the joy of missing out. Originally used to celebrate disconnecting from technology, the term has been adopted by nocoiners—people who abstain from cryptocurrency investments—to express relief for avoiding losses related to scam projects and the popping of the bitcoin bubble.
JOMO is the opposite of FOMO, or the fear of missing out, which characterized the 2017 token frenzy. Near the peak of ICO mania last summer, one project raised $35 million in less than a minute. Just like the dotcom bubble, nobody wanted to be left behind. After all, in the words of American economist Charles Kindleberger, “there is nothing so disturbing to one’s well-being and judgment as to see a friend getting richer.”
Now, those left behind by the boom can relish in the bust, indulging in a bit of JOMO and its close cousin, schadenfreude.
[mailto filter=”Jargon” subject=”De-jargonize this…”]Heard a new crypto term? We can tell you what it means.[/mailto]
[/supplemental]
Please send news, tips, and binary options to privatekey@qz.com. If this email was forwarded to you, click here to sign up for your own subscription, which includes a free two-week trial. Today’s Private Key was written by Matthew De Silva and John Detrixhe, and edited by Oliver Staley and Jason Karaian. When things go wrong, don’t go with them.