July 12, 2018 Newsletter. If you’d like to receive analysis like this everyday. Subscribe here.
Forbes wrote an article titled, “How To Short Sell Bitcoin, And Why More People Aren’t.” For those who are new to trading cryptocurrency, you might log-on to Coinbase and wonder, why can’t I go short? The simple answer is that the infrastructure for cryptocurrency trading is immature.
I want to explain how shorting works. Pretend I am going to short Coca-Cola stock. I’d first need to enable margin trading on my account. Margin trading allows an investor to lend from the broker. Anyone who’d like to short a stock needs to obtain margin trading because they could lose more than 100% of their position (e.g., if the stock more than doubled you’d owe more than 100% of your principal). I’d then enter a trade on my account, and I’d be short Coca-Cola. Behind the scenes, the broker is lending you 10 Coca-Cola stocks, and you are immediately selling them. When you want to cover your position, you’d buy (also known as covering) the Coca-Cola back in the open market and exit out of the position.
So why can’t Coinbase or other exchanges faciliate lending cryptocurrency? Bitcoin and other cryptocurrencies are incredibly volatile. It’s not unlikely to see moves of more than 10% in one day. This volatility rarely happens in other markets. As such, volatile assets are dangerous to short because the counter-party (the one lending the asset) takes on a lot of risks. Some companies will allow you to short cryptocurrencies, but you’ll have to pay a high rate of interest. If I can’t short Bitcoin or other cryptocurrencies through Coinbase and other brokers, how can I go short? Great question, here is the answer:
- Contracts for Difference — A contract for difference allows you to short Bitcoin without actually taking a loan. In essence, you are making a deal with a counter-party and hoping that they will honor the agreement when push comes to shove.
- Future trading — CBOE and CME offer futures on Bitcoin where you can short the futures. Technically, you aren’t shorting Bitcoin, but Bitcoin Futures (which closely tracks the price of Bitcoin).
- Option Trading — Ledger X allows you to buy puts and calls on Bitcoin.
- BitMex — Technically, BitMex’s contracts are considered futures, but they operate differently than traditional futures because the contracts are in perpetuity and act more like swaps.
- Short ETF/ETNs — Instruments like Greyscale’s Bitcoin ETF which trades over the counter can be shorted. However, the ETF doesn’t always correlated with the price of Bitcoin.
As cryptocurrency markets mature, expect traditional exchanges to offer the ability to go short. For now, you are left with the options above.
A few days ago, I wrote about Augur’s launch. Today, Coindesk published a story about how Augur surpassed Crypto Kitties in daily active users (DAU). I’m not a huge fan of using DAU as a metric for dApps. The way DAU is measured is by looking at on-chain transactions. If I log onto a dApp, but don’t complete an on-chain transaction, I am not considered a user for that day. Augur has about a few hundred DAUs. Coindesk writes:
That makes Augur a big fish in a very small pond, though, with just 300 wallet addresses (a flawed proxy for users) interacting with its smart contracts. It does better — third place — in terms of the volume of ether those smart contracts have processed, as the figure is 910 ETH (or around $400,000). By comparison, CryptoKitties saw just 23 ETH (or $10,000) in volume.
Let’s assume all the wallet addresses are unique users and let’s assume that each account wagered an equal amount of money. This would mean that the average user wagered ~$1,333. This would be an impressive number if REP (Augur’s token) wasn’t valued at $330MM. Let’s look at a wager placed a few days ago:
France played Belgium and about ~$17,000 has been wagered on the result. However, the resolution period hasn’t ended.
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