The Contrarian

“In the investment markets, what everyone knows is usually not worth knowing.”

Shorting Bitcoin

The global bitcoin mania is a growing faster than the California wildfires. On Monday we will see the futures contracts on bit coin starting to trade. It is estimated that soon there will be over 200 exchanges worldwide trading bit coin. That will only increase the frenzy. The founder of one brokerage firm, interactive brokers a, said yesterday that he would not be surprised if bitcoin would go over $100,000, but eventually it would be at zero dollars. That just about reflects our thinking.

If you are thinking about participating in this mania, be sure it’s only money that you could lose and it never worry about it. But spend a lot of time first investigating what you’re getting into. The article below, from the street.com, is excellent to tell you about the huge premiums being charged, the interest rates as high as 50% when you borrow the bit coin’s in order to sell short, etc.

This is not a market for neophytes, and definitely not a market for your children’s tuition money. In fact, even with the decades of experience we have in the markets, we would not touch it. There are many more pleasurable ways to get rid of your money.

If you’re not buying into the bitcoin hype, now could be the time to go short, as fees related to placing a short bet on the cryptocurrency could more than double when bitcoin futures go live next week. Kinsey Grant from TheStreet has more to say

Bitcoin is going wild Thursday, Dec. 7. But if you’re not buying the rally, now could be the time to place your short bets.

The digital currency has surpassed five major threshold prices in the past two days. After trading above $16,100 midday Thursday, bitcoin pared gains slightly, still higher 16.18% for the day to $15,971.05 Thursday afternoon.

The surge in price comes ahead of the Sunday, Dec. 10, start date for bitcoin futures on Cboe. A week later, on Dec. 17, bitcoin futures will become available on CME. Investors looking to short bitcoin need to take action before futures start trading, according to S3 Analytics.

Shorts on Grayscale Investment’s Bitcoin Investment Trust (GBTC) , which is the only ETF whose performance is directly tethered to bitcoin’s market price, has averaged $21 million for the year. Short interest hit a high of $71 million on Tuesday, Dec. 5.

Shorts are down $45.9 million in year-to-date mark-to-market loss, S3 wrote, or down 217%. About $39 million of that loss has been registered since October, when the bitcoin rally amped up considerably.

But the cost to short bitcoin hasn’t been cheap, S3 found. Stock borrow costs have averaged a 10.2% fee for the year, and “borrow rates are getting more expensive as borrow supply diminishes,” S3 said. Since GBTC is more of a retail-owned stock than an institutionally owned stock, new shorts are being charged an 18.5% fee.

“If short interest continues to climb, we should see new borrow rates hit the 50% fee level quickly,” S3 said.

The cost to short the GBTC fund could rise higher than 50% and possibly near 100% by the time the first futures contract trades, S3 noted. Many analysts have asserted bitcoin is headed for a pullback when futures open for trading.

“While the futures contract will allow easier and safer bitcoin short selling, it will also allow for easier and safer bitcoin long buying,” S3 said. “Long GBTC holders may feel the pain of its 53% asset premium shrinking, while short-sellers will probably be incurring a 50%+ stock borrow fee — both sides will be paying a premium in order to ride the bitcoin roller coaster once the CbOE futures start trading.”

My View: As the bitcoin rollercoaster continues, we don’t know how high mania can go. But we do know that currently there are many waiting in the sidelines ready to short bitcoin at their first chance. It will be those who can time the market perfectly and account for rising borrowing costs that make out like bandits. Of course, Bitcoin can double, triple, or even 10X, but mania never continues in the long run and this futures market may be a game changer.

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