The exchange part of Bitcoin has always been sort of the wild west to me. No standardization. No real regulation. Most of the big time trading is done bilaterally. DRW’s Cumberland Mining in Chicago is the center of the universe when it comes to making markets. It doesn’t surprise me there are a lot of market makers in Chicago. It’s what we do. Retail goes to New York. Chicago is about professional industrial strength markets.
When I think about market structures, I always wonder who are the natural buyers and who are the natural sellers. It’s easy to think about who will speculate. It’s easy to think about who might come in and be a retail trader. Hot money flows through the trading world constantly and right now all the hot money is in crypto. By hot money, I mean money looking for a quick return.
Long-term holders of BTC are natural shorts. A company like Overstock would be a natural short. I cannot figure out who the natural longs are yet other than speculators that want to get in the game. As soon as a strong use case for Bitcoin emerges, natural longs will appear. If we looked at wheat as a comparison, there are plenty of natural longs and shorts on each side.
Surfing the net this morning I ran into this article on shorting Bitcoin. As futures traders know, the best trades that make the most money the fastest are often shorts, not longs. Markets break faster than they rally. Of course, shorting Bitcoin might be suicidal for your account. Even permabear Tim Knight won’t short Bitcoin but I can tell he is thinking about it. Here are a couple of tweets.
— Tim Knight (@SlopeOfHope) November 27, 2017
$0000 – $1000: 1789 days
$1000- $2000: 1271 days
$2000- $3000: 23 days
$3000- $4000: 62 days
$4000- $5000: 61 days
$5000- $6000: 8 days
$6000- $7000: 13 days
$7000- $8000: 14 days
$8000- $9000: 9 days
— Tim Knight (@SlopeOfHope) November 27, 2017
The reason so many pro traders are looking at shorting Bitcoin is the ramp up in prices. It’s just not really sustainable if it’s a regular type of market. Kristoffer Koch was writing a thesis on encryption in 2009 when he spent about $27 to buy 5,000 bitcoins. Koch’s original $27 investment is now worth about $886,000, That’s a return of 3,281,500% in four years.
We are entering peak crazy when it comes to Bitcoin. A man is searching a landfill in Britain for a hard drive he threw out. It has $7.5MM in Bitcoin on it that he bought. Travis Devitt tweeted, “BTC will easily be the biggest bubble of all time. It’s globally tradable by non accredited investors and has no valuation anchors, plus the world is much more interconnected and experiencing record low-interest rates“. (italics mine) Veteran trader Art Cashin said, “Bitcoin has gone parabolic and that usually doesn’t end well.” Of course, pioneering cryptocurrency investor Mike Novogratz said Bitcoin is going to $40K. That’s what makes a market. But, it’s all pure speculation.
Private markets misprice things all the time. This is especially true because of low-interest rates. It changes the cost of capital and distorts markets. I think it is very important to note that Bitcoin is not super liquid. In the grand scheme of things, the market is very small. FOREX overnight trade is measured in trillions. That’s liquid and currencies are rarely mispriced for very long.
This may be related, or unrelated but in a much-hyped bid, Softbank offered 30% less than the current valuation of Uber shares to existing investors. I know that Uber isn’t Bitcoin, but I keep hearing that Bitcoin isn’t a currency and isn’t a commodity either. Advocates say that it is a new technology and so was Uber. I am willing to concede that Bitcoin is an amalgam of a lot of different things. At the same time, markets are markets and anything that is traded eventually has to comply with the iron laws of economics.
If you have a strong stomach here are ways to short Bitcoin
- Contracts for Difference, this is a straight bilateral agreement with a counterparty. You have risk the counterparty won’t perform (and vice versa)
- Margin Trading-you borrow Bitcoin from a broker on margin. Margins are high given the underlying volatility and liquidity.
- Borrow to Short-you might be able to do this in a brokerage account if your broker lets you
- Futures-Ledger X has a type of futures contract called a swap. Ledger X is not an “exchange”. It’s a SEF or swap execution facility. The swap is a contract for difference but traded on a more organized platform. CME and CBOE will be rolling out different versions of futures contracts later this month. I’ll do a blog post explaining the difference soon.
- Shorting Exchange Traded Notes-There are ETFs and other indexed products out there that trade on different exchanges. You can short them, but it’s an imperfect short if you want 100% exposure to one particular cryptocurrency.
If you want to short there is one more thing you need to know. Dennis Gartman hasn’t bought any yet and thinks it goes to zero.