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Credit: Manuel Romano / NurPhoto via Getty Images.
During the first seven months of 2018, the price of bitcoin fell by 53%, a decline presumably triggered by worries regulation, hack exchange and a general slowdown in trade.
For the most part, the decline was a disaster, destroying small fortunes invested in the flourishing cryptocurrency market.
For others, the December 2017 crash triggered a boon, conveniently coinciding with the creation of the first traditional methods of betting against bitcoins.
Bitcoin Futures arrived at the Chicago Board Options Exchange in December. Credit: AP Photo / Kiichiro Sato.
The dawn of the encrypted short sale
Until recently it was not easy to bet against bitcoins: if you thought that a cryptocurrency was overrated, your only chance was to sell what you held.
Everything changed on December 10 when the Chicago Board Options Exchange (CBOE) opened the inaugural futures market for bitcoins, followed a week later by a futures market on the Chicago Mercantile Exchange (CME).
Bitcoin futures meant that critics could, for the first time, bet on falling prices in bitcoins, buying and selling contracts with a lower delivery price in the future than the current price.
The advantage for large financial institutions is that these futures markets do not rely on them to get involved in the messy business of buying, holding and selling cryptocurrencies.
Some even linked the opportunity to short-cut the next bitcoin price from Christmas.
"The new investment opportunity has led to a drop in demand in the spot bitcoin market and therefore to a fall in prices. With the fall in prices, the pessimists have started making money with their bets, fueling further short sales and a further downward pressure on prices, "he wrote the Federal Reserve Bank of San Francisco at the start of this summer.
At the beginning of July, CME's daily bitcoin futures volumes reached 6,789 contracts. This is $ 224 million of betting on the future price of bitcoins in a single day.
Simon Taylor, co-founder of 11: FS.Credit: 11: I am selling.
It's nice to be short
Short selling has a bad blow, especially in stocks, where short sellers are often seen as the betting markets will fall, businesses will fail and jobs will be lost.
But in the end, the short is a fundamental check and a balance against the excess of optimism in any market.
"The short is & nbsp; a part of the creeping legitimacy of the bitcoin: we are getting access to adequate financial products" Simon Taylor, co-founder of fintech consulting 11: FS, said Forbes.
In & nbsp; his note titled "How futures change bitcoin prices", the Federal Reserve Bank of San Francisco explained in detail how the short sale have a positive impact on the price of bitcoins decreasing the "speculative dynamics" of the crypt, while promoting its "transactional advantages".
And this is good news, because the methods for shortening cryptography continue to grow.
It should be noted that the short circuit has a huge risk, unlike the purchase of a bitcoin in which the potential losses are limited to the value that is purchased in. With a short, traders can be left to hook for many times their original position if prices go up.
As the price of Bitcoin has declined, options for short selling are on the rise. Credit: Chesnot / Getty Images.
Margin trading
One of the most popular and risky ways for short bitcoins or any cryptocurrency is known as margin trading.
There are a number of trades that allow margin trading, which allows traders to borrow other bitcoins for an exchange.
In this case of a short, the seller could borrow other bitcoins to sell, using their own funds as collateral, and then repurchase the bitcoin from the market in the future to repay the loan (hopefully when the price of the bitcoin will be decreased).
"These types of trading schemes exist in the professional trading world, so there's absolutely a place, we think, in the cryptocurrency space, to have that kind of functionality," said Josh Goodbody, general councilor for Huobi United Kingdom, a cryptographic exchange & nbsp; offers margin exchanges for its 30 million users.
Contracts by difference
Another common way of shorting bitcoins is through CFDs.
CFDs are a financial instrument that forms a contract between a buyer and a seller, in which each undertakes to pay the other any increase or decrease in the price of an asset by a certain date.
Bitcoin tracker funds
There are several listed tracker funds that are now specialized in bitcoins.
Names like Bitcoin Tracker One on the Nasdaq exchange in Stockholm or Grayscale's Bitcoin Investment Trust are essentially bitcoin vehicles, which you can define as any equity.
They emerged as a way to shorten Andrew Left, a famous seller in the United States, used them to do so bet against bitcoin in December.
Steve Swain and Linda Wang, co-founders of LendingBlock.Credit: LendingBlock.
The future of the short circuit?
It may seem that there is now a whole range of options to bet against Bitcoin, but for some we are only at the beginning.
"The conclusion is that I think the tools have not existed yet [for traders] be able to express all their opinions. & nbsp; Short film is an important part of putting opinions or beliefs into practice, "Steve Swain, co-founder and CEO of LendingBlock, said Forbes.
LendingBlock hopes to exploit the growing interest in encrypting links by creating a market for large financial institutions that borrow and lend cryptocurrencies, with loans governed by smart blockchain contracts.
"We are trying to recreate the equivalent of securities lending, which is a massive and mature part of the financial ecosystem in conventional stocks and bonds, but for digital assets," said Swain, who raised $ 10 million. from an initial money supply in April to finance the growth of LendingBlock.
LendingBlock has already started pilot projects with Octagon Strategy, an encryption company in Asia, an encryption exchange based in Japan Quoine and Genesis Capital, one of the largest US encryption companies.
Growing worries
As mentioned above, there is a huge risk in short selling cryptocurrencies, but it is not the only concern.
"The real challenge facing many people is that the infrastructure is still very immature throughout the cryptographic space," says Taylor of 11: FS.
One example is the lack of custody solutions for institutions that actually retain bitcoins, though as we wrote at the beginning of this week, companies like Ledger are working on solutions.
Another example is the difficulties in the markets of future CMEs and CBOEs.
They both bet on what the future price of bitcoin will be and such futures bets are regulated by the Commodity Futures Trading Commission (CFTC) in the United States, but where do they get the price of today's bitcoins to decide who won the bet?
"The futures market price is set by the price of spot markets on exchanges like Coinbase and Kraken," Taylor says. & Nbsp;"But there is no regulator to ensure that the market or price manipulation is not happening in trade, so how do we know the spot price is credible?"
Indeed the CFTC has started an investigation in the manipulation of the bitcoin futures market & nbsp; in June to identify where spot prices for CME Group's bitcoins futures are coming.
For now, this kind of questions, concerns and lack of regulation about how today's "price" of bitcoin is decided is sufficient to dissuade many from betting against Bitcoin, even if the market continues to fall.
UPDATE & nbsp; 2018-07-12 – Added details on the CFTC survey on future bitcoins.
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Credit: Manuel Romano / NurPhoto via Getty Images.
During the first seven months of 2018, the price of bitcoin fell by 53%, a decline presumably triggered by worries regulation, hack exchange and a general slowdown in trade.
For the most part, the decline was a disaster, destroying small fortunes invested in the flourishing cryptocurrency market.
For others, the December 2017 crash triggered a boon, conveniently coinciding with the creation of the first traditional methods of betting against bitcoins.
Bitcoin Futures arrived at the Chicago Board Options Exchange in December. Credit: AP Photo / Kiichiro Sato.
The dawn of the encrypted short sale
Until recently it was not easy to bet against bitcoins: if you thought that a cryptocurrency was overrated, your only chance was to sell what you held.
Everything changed on December 10 when the Chicago Board Options Exchange (CBOE) opened the inaugural futures market for bitcoins, followed a week later by a futures market on the Chicago Mercantile Exchange (CME).
Bitcoin futures meant that critics could, for the first time, bet on falling prices in bitcoins, buying and selling contracts with a lower delivery price in the future than the current price.
The advantage for large financial institutions is that these futures markets do not rely on them to get involved in the messy business of buying, holding and selling cryptocurrencies.
Some even connected the opportunity to short-cut the next bitcoin price decline from Christmas.
"The new investment opportunity has led to a drop in demand in the spot bitcoin market and therefore to a fall in prices. With the fall in prices, the pessimists have started making money with their bets, fueling further short sales and a further downward pressure on prices, "he wrote the Federal Reserve Bank of San Francisco at the start of this summer.
At the beginning of July, CME's daily bitcoin futures volumes reached 6,789 contracts. This is $ 224 million of betting on the future price of bitcoins in a single day.
Simon Taylor, co-founder of 11: FS.Credit: 11: I am selling.
It's nice to be short
Short selling has a bad blow, especially in stocks, where short sellers are often seen as the betting markets will fall, businesses will fail and jobs will be lost.
But in the end, the short is a fundamental check and a balance against the excess of optimism in any market.
"The short is a part of the creeping legitimacy of bitcoin: we are getting access to adequate financial products" Simon Taylor, co-founder of fintech consulting 11: FS, said Forbes.
In its note entitled "How futures change bitcoin prices", the Federal Reserve Bank of San Francisco explained in detail how the short sale have a positive impact on the price of bitcoins decreasing the "speculative dynamics" of the crypt, while promoting its "transactional advantages".
And this is good news, because the methods for shortening cryptography continue to grow.
It should be noted that the short circuit has a huge risk, unlike the purchase of a bitcoin in which the potential losses are limited to the value that is purchased in. With a short, traders can be left to hook for many times their original position if prices go up.
As the price of Bitcoin has declined, options for short selling are on the rise. Credit: Chesnot / Getty Images.
Margin trading
One of the most popular and risky ways for short bitcoins or any cryptocurrency is known as margin trading.
There are a number of trades that allow margin trading, which allows traders to borrow other bitcoins for an exchange.
In this case of a short, the seller could borrow other bitcoins to sell, using their own funds as collateral, and then repurchase the bitcoin from the market in the future to repay the loan (hopefully when the price of the bitcoin will be decreased).
"These types of trading schemes exist in the professional trading world, and so there's absolutely a place, we think, in the cryptocurrency space, to have that kind of functionality," said Josh Goodbody, general advisor for Huobi UK, an encrypted exchange offering margin exchanges for its 30 million users.
Contracts by difference
Another common way of shorting bitcoins is through CFDs.
CFDs are a financial instrument that forms a contract between a buyer and a seller, in which each undertakes to pay the other any increase or decrease in the price of an asset by a certain date.
Bitcoin tracker funds
There are several listed tracker funds that are now specialized in bitcoins.
Names like Bitcoin Tracker One on the Nasdaq exchange in Stockholm or Grayscale's Bitcoin Investment Trust are essentially bitcoin vehicles, which you can define as any equity.
They emerged as a way to shorten Andrew Left, a famous seller in the United States, used them to do so bet against bitcoin in December.
Steve Swain and Linda Wang, co-founders of LendingBlock.Credit: LendingBlock.
The future of the short circuit?
It may seem that there is now a whole range of options to bet against Bitcoin, but for some we are only at the beginning.
"The conclusion is that I think the tools have not existed yet [for traders] be able to perform all their opinions. The short is an important part of putting opinions or beliefs into practice, "said Steve Swain, co-founder and CEO of LendingBlock, Forbes.
LendingBlock hopes to exploit the growing interest in encrypting links by creating a market for large financial institutions that borrow and lend cryptocurrencies, with loans governed by smart blockchain contracts.
"We are trying to recreate the equivalent of securities lending, which is a massive and mature part of the financial ecosystem in conventional stocks and bonds, but for digital assets," said Swain, who raised $ 10 million. from an initial money supply in April to finance the growth of LendingBlock.
LendingBlock has already started pilot projects with Octagon Strategy, an encryption company in Asia, an encryption exchange based in Japan Quoine and Genesis Capital, one of the largest US encryption companies.
Growing worries
As mentioned above, there is a huge risk in short selling cryptocurrencies, but it is not the only concern.
"The real challenge facing many people is that the infrastructure is still very immature throughout the cryptographic space," says Taylor of 11: FS.
One example is the lack of custody solutions for institutions that actually store bitcoins, although as we wrote earlier this week, companies like Ledger are working on solutions.
Another example is the difficulties in the markets of future CMEs and CBOEs.
They both bet on what the future price of bitcoin will be and such futures bets are regulated by the Commodity Futures Trading Commission (CFTC) in the United States, but where do they get the price of today's bitcoins to decide who won the bet?
"The futures market price is set by the price of spot markets on exchanges like Coinbase and Kraken," Taylor says. "But there is no regulator to ensure that the market or price manipulation is not happening in trade, so how do we know the spot price is credible?"
Indeed, the CFTC initiated an investigation into the manipulation of the bitcoin futures market in June to identify where spot prices of CME Group's future bitcoins come from.
For now, this kind of questions, concerns and lack of regulation about how today's "price" of bitcoin is decided is sufficient to dissuade many from betting against bitcoins, even if the market continues to fall.
UPDATE 2018-07-12 – Added details of the CFTC survey on future bitcoins.
