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The people here talking about shorting bitcoin to moderate the bubble have no idea what they're talking about. Shorting a bubble is about the stupidest thing yo
by minimax 14y ago
The people here talking about shorting bitcoin to moderate the bubble have no idea what they're talking about. Shorting a bubble is about the stupidest thing you can do. Here's how that math works:
1) You open a margin account with $10,000.
2) You borrow 25 BTC from your broker and sell them on the market at $200. You hope that the price crashes to $0 and your net profit will be $5,000.
3) What actually happens is that the price doubles to $400. It would now cost you $10,000 to close your position (buy the 25 BTC back at market prices).
4) Your broker realizes this and decides -- without asking -- that it doesn't like this state of affairs and closes the position for you, wiping out your margin.
5) You are now $10,000 poorer.
- wmf 14y agoBut that would moderate the bubble somewhat, would it not?
- minimax 14y agoWe're talking about opening a short position in the face of manic buying. Buyers will still vastly outnumber sellers, and in the end you'll be forced to buy back at a higher price in a so-called short squeeze which will drive prices even higher. Lots of reasonable people thought they could short the dot com bubble only to get creamed as prices moved higher.
- yarou 14y agoAnd? This is the very definition of a margin call. Retail investors ought to RTFM when it comes to financial services products, especially when it comes to forex.
- minimax 14y agoYes I was just walking through the mechanics of a margin call on a short position that goes sour. Lots of people understand that shorting helps you profit when prices decrease, but not everyone understands the risks, especially in the face of manic bubble buying.
- namuol 14y agoAll I ever hear about shorting is that it's risky. It's literally lesson #1[1]. *[1] https://www.khanacademy.org/science/core-finance/stock-and-bonds/shorting-stock/v/basic-shorting https://www.khanacademy.org/science/core-finance/stock-and-b...
- Permit 14y agoYou've got the right idea, but I think your numbers are off. If you shorted 25 BTC at $200.00 would you not be credited with $5,000? So when the price rises to $400 you would have to buy back the equivalent amount with $5,000 of your own dollars and $5000 from the original short.
- minimax 14y agoMath fail on my part. Thanks.
- T-hawk 14y ago5) You are now $10,000 poorer. You are now $5,000 poorer. You received $5k from selling the BTC in step 2, which must be netted out against the $10k cover cost.
- minimax 14y agoYep. My bad.
- emin_gun_sirer 14y agoDon't forget that the short squeeze also feeds the runaway price of BTC and props it even higher.
- jessriedel 14y agoIs there no scheme for shorting an asset over arbitrary timescales whose maximum possible loss is capped?
- betaclass 14y agoYou BUY PUT options -- you buy the right to sale at a given price for some period of time. The most you can lose is what you paid out for the put option. If the price of the underlying commodity falls below the strike price, you essentially get the difference -- you buy at the new lower price and sell at the higher price.
- jessriedel 14y agoAhh I've of course heard of these. Thanks. This sounds like something Coinsetter would do. The only problem is that it puts the seller of the put option on the hook for an uncapped loss. Presumably there is some way to combine these techniques to allow downward pressure on a stock/index while making sure no one has to be so exposed.
- kevinpet 14y agoI talked about shorting bitcoin to moderate the bubble, and I have some idea what I'm talking about. Don't confuse "shorting will stabilize the price" with "it's a good idea to short bitcoin". A shorting mechanism makes it possible for people who are not bullish to participate in the price discovery process. Without a way to short, there are only two participants in the price discovery mechanism -- those who previously acquired bitcoin and now think that they're overvalued and those who think they will continue to appreciate and want to buy more. There is no way for someone who bought at $20 and got out at $100 to express an opinion that $200 is an unsustainable bubble. Kid Dynamite wrote a good post about how an inability to borrow can keep a market irrational for a long time here: http://kiddynamitesworld.com/on-misinterpreting-pslvs-premium/ http://kiddynamitesworld.com/on-misinterpreting-pslvs-premiu... It's irrelevant whether shorting bitcoin is going to make anyone money, or when shorting will make people money vs. when it will wipe you out on a margin call. I'm only talking about how the ability to short will make the market more efficient.
- wamatt 14y agoThe implicit assumption that there is a bitcoin bubble, is not a fact. Was the .com speculation the last two decades a bubble? Is Facebook stock circa 2007 a bubble? etc Rational arguments can be both ways and I'd be wary of anyone selling certitude on either side the fence.
- kokey 14y agoThe more likely scenario is getting the timing wrong, e.g. price goes up to, say $300 before falling down to $100. If you don't have enough to cover it when it hits $300 or the balls to stay in until it goes down, you can still end up with a lot of pain. In the end it's the simplest to either go long or stay out, and let those who know how to manage the risk do the shorting work.