> It also allows them to short—bet on a falling price—the cryptocurrency they borrow against the one they lend, mimicking a common tactic among hedge funds. The investor can sell the cryptocurrency they borrow on the open market and hope to buy it back at a lower price, pocket the difference and return the currency to the lender. Meanwhile, they are betting the currency they handed over as collateral doesn’t fall by as much as the one they borrow.
I mean it makes sense that someone would come along and try and build a business around this as many hedge funds are already doing this sort of stat arb already. Locking down borrow is a real pain at the moment for a few reasons:
- no standardized terms for collateral, terms, and borrow prices
- no api to ping people for borrow
- no way to get borrow quickly, ie if you see a short term trend you can't get borrow quick enough to do the trade before the market "arbs" out your anomaly.
I don't however think this will be what makes people start to short bitcoin as I don't know who wants to make a pure directional bet on bitcoin going down at the moment. Like the commodity guys, CTA's, learned many years ago, you don't fight the trend, you latch onto it and ride it.
Shorting bitcoin seems like trying to short China a few years ago. You can know that something is wrong and the numbers are all made up but being right doesn't matter when the market ignores fundamentals.
Or put another way, in a trending market you can be right and get your face ripped off, or accept it and make money on the trend.
> I don't know who wants to make a pure directional bet on bitcoin going down at the moment
There's a line of reasoning that if no one thinks a security or asset will fall in price that's the best setup for it to do so. (If everyone thinks it's going up, from where would new buying money come?)
I don't have a position in BTC (or any other coin), but I think it's likely that BTC hits $5K before it hits $20K.
Getting liquidity to short or long on margin is as easy as clicking a button and getting liquidated.
Poloniex, Bitfinex and BitMex are some of the places you can play that game. You can even become a BTC lender on some of those exchanges and get around 20% APR since loans can be compounded every 1-2 days or even shorter depending on the duration of positions people open.
I think it heavily depends on their client country of origin. Here as long as bitcoin aren't officially recognized as bearer bonds of sort you can trade them around freely and the state only comes in questioning about plusvalences when you convert them back into money.
> You can know that something is wrong and the numbers are all made up but being right doesn't matter when the market ignores fundamentals.
You can participate in the market simply by not buying. If nobody offers the short, it is not possible to accept it.
In the case of BTC, one could arrange a private short (you loan me your BTC, for which I will pay you interest and return your BTC in two years) and short it that way. Caveat trader.
This is when the real fun begins for cryptos with oversized floats. Look to see a lot of naked shorting https://www.investopedia.com/terms/n/nakedshorting.asp as it will be the primary means of enabling WallSt sharks to create "death spirals" https://www.investopedia.com/terms/d/deathspiral.asp by creating artificial over-supply https://www.investopedia.com/terms/a/ax.asp driving a cryptos price down so they can scoop it up at rock bottom prices. There will be other cryptos with smaller floats that will burn shorts via the classic "short squeeze" driving the price up for these cryptos at the same time.
In the cash equities markets you can naked short because the exchange doesn't hold your shares. In bitcoin the exchange itself holds your bitcoin so they can only allow you to short what you own.
How do you propose a user naked shorts something on a bitcoin exchange where the exchange can simply not let you enter the sell without the required bitcoin?
There are crypto exchanges that allow naked shorting. As long as you hold the equivalent USD or EUR amount in the exchange, Cexio for example will let you margin short BTC with 3x leverage, when you don't actually own the BTC.
A "note" by a partner investment house or broker that will back you, because of your rep with them or because you've got an inside track, saying that you do "own" the required amount. This is how it works on the traditional Street. And it won't just be Bitcoin, but now most crypto according to what the article is describing.
> A "note" by the a partner investment house or broker that will back you, because of your rep with them or because you've got an inside track, saying that you do "own" the required amount. This is how it works on the traditional Street
In the cash equities markets?
Maybe 15 years ago. But in the past 10+ years, you have to have the shares to short or you get in "alot of trouble.".
What you are describing is straight up illegal and no prime broker will allow this.
I get that you probably don't work in the markets and you are relaying on something you read, don't feel too bad, there is alot of mis-information about wall street out there :)
So I’m still unclear on how this works. The difference with shorting a stock is that the short seller actually has to give the bitcoins to the person they sell the shorted bitcoins to - a “signed note” doesn’t work. The person buying the btc from the one shorting expects bitcoins to appear in their wallet. Where do those bitcoins come from? In the case of a short sale, the brokerage can manufacture imaginary “negative shares”, say a piece of paper, like you say. But that doesn’t work here because the brokerage can’t manufacture bitcoins.
To put it another way, let’s say you are shorting gold, but your counterparty won’t accept a piece of paper. They want delivery, like an actual gold bar. That gold bar has to come from someone who now has one less.
It's more about what's possible with "short interest" and falsely reporting "shares short" that can give the perception that there is more supply than there really is thereby inhibiting buyers and increasing sell pressure. It's a form of high level manipulation that occurs in the traditional markets everyday. How this kind of manipulation translates to crypto is up for grabs, but some form of it is coming I can guarantee you that. Source, me: https://news.ycombinator.com/item?id=13844765
No, it isn’t. Brokers certify ownership through official channels. Lying about a customer’s account is fraud. In the repo market, that is investigated directly by the Federal Reserve. Naked repos aren’t a thing.
> Does that mean that you think that it doesn't happen?
It happens, but it’s rare, at least with repos. Treasuries are tracked by the CUSIP—the U.S. Treasury knows every nominal owner. Being short-term, settled up front and centrally tracked makes it a bad place to attempt fraud.
Fraud is a frequency, not binary, metric. Fraud in crypto-currencies is rifer than anything we’ve seen in America for generations. Complaining about potential repo fraud when BitConnect and pump and dumps run rampant is a bit silly.
When vehicles are created to short crypto you can bet there will be manipulation on the short side. This is why it's relevant according to my experience and the experience of others, see:
I also trade crypto. Just trying to provide insight that might protect a few people related to my first hand experiences in the traditional financial markets running a public company in the OTC markets.
In a mature liquid market, like exist for major US equities for example, you'd go long bitcoin and short bitcoin cash. Your broker would calculate the margin ratio on the total position and so you wouldn't get a margin call just because the bitcoin cash part went up, so long as bitcoin went up even more. There'd likely be some sort of carry cost.
But bitcoin, and especially bitcoin cash, doesn't have a mature liquid market, so this really isn't possible in any sort of off the shelf way. If you wanted to put at least a few hundred million into the position maybe you could get an investment bank interested. But even then they might not want to touch bitcoin cash.
Could you clarify your second point? Would they manipulate the market in a way that is detrimental to you? Would it help that you were not their customer, but someone else's?
I mean it makes sense that someone would come along and try and build a business around this as many hedge funds are already doing this sort of stat arb already. Locking down borrow is a real pain at the moment for a few reasons:
- no standardized terms for collateral, terms, and borrow prices
- no api to ping people for borrow
- no way to get borrow quickly, ie if you see a short term trend you can't get borrow quick enough to do the trade before the market "arbs" out your anomaly.
I don't however think this will be what makes people start to short bitcoin as I don't know who wants to make a pure directional bet on bitcoin going down at the moment. Like the commodity guys, CTA's, learned many years ago, you don't fight the trend, you latch onto it and ride it.
Shorting bitcoin seems like trying to short China a few years ago. You can know that something is wrong and the numbers are all made up but being right doesn't matter when the market ignores fundamentals.
Or put another way, in a trending market you can be right and get your face ripped off, or accept it and make money on the trend.