Many people want to short bitcoin but don't

The mechanics are there, and so is some volatility

Have I apologised yet for how wrong I was about Bitcoin futures? In the weeks before Bitcoin futures started trading at Cboe Global Markets Inc. and CME Group Inc., a lot of people argued that Bitcoin futures would finally provide a convenient way to short Bitcoin, and that the shorts would rush in and deflate the price. Meanwhile I was galaxybraining around being like “no no no you see this is a convenient way to buy Bitcoin, which was previously just as hard for careful conservative financial institutions as shorting it was, and so the introduction of Bitcoin futures will make the price go up.” And then the futures started trading and I took a victory lap, like, five minutes into the trading session, when Bitcoin hit a new record high.

And then it fell and has never recovered; Bitcoin is worth about half what it was when futures were introduced. If you read my posts about how futures would be good for Bitcoin prices and put all your money in Bitcoin … sorry about that? I don’t know, if you took anything here as investing advice then I think that is more your fault than mine, but nonetheless I confess that my call was pretty bad.

Here’s a Federal Reserve Bank of San Francisco Economic Letter about “How Futures Trading Changed Bitcoin Prices.” I suppose it is easier to be right about that question six months after the futures were introduced than it was a week before they were introduced, but still, the San Francisco Fed’s analysis is a little too textbook for my tastes:

Before December 2017, there was no market for bitcoin derivatives. This meant that it was extremely difficult, if not impossible, to bet on the decline in bitcoin price. Such bets usually take the form of short selling, that is selling an asset before buying it, forward or future contracts, swaps, or a combination. Betting on the increase in bitcoin price was easy — one just had to buy it. Speculative demand for bitcoin came only from optimists, investors who were willing to bet money that the price was going to go up. And until December 17, those investors were right: As with a selffulfilling prophecy, optimists’ demand pushed the price of bitcoin up, energising more people to join in and keep pushing up the price. The pessimists, however, had no mechanism available to put money behind their belief that the bitcoin price would collapse. So they were left to wait for their “I told you so” moment.

This one-sided speculative demand came to an end when the futures for bitcoin started trading on the CME on December 17.

Umm look I guess. On the other hand let’s say you had found a convenient and inexpensive way to short Bitcoin in, say, December 2016. No borrow costs, no creepy exchanges, just a perfect seamless way to sell Bitcoins now and buy them back in the future. If you did that on December 17, 2016 — a year before futures were actually introduced — you’d have had a 100percent loss by May. If you did it in May, you’d have had a 100-percent loss by August. If you did it in August, you’d have had a 100-percent loss by October. If you did it in October, you’d have had a 100-percent loss by November. If you shorted Bitcoins in November 2017, hoo boy.

I don’t entirely believe that the Bitcoin futures market is full of people taking naked short Bitcoin bets, is I guess my point here? The difficulty of shorting Bitcoin is not primarily about the mechanics of finding a way to short. It’s primarily about Bitcoin’s huge volatility and rapid rise and general ability to blow shorts up in like a day. You can find a lot of people pontificating that they’d love to short Bitcoin (here’s Bill Gates!), but they all … can … and … don’t? (Here’s Tyler Winklevoss telling Gates, go ahead, short Bitcoin, be my guest.) Even with the introduction of Bitcoin futures, there is no convenient way to express the view that “Bitcoin will eventually go to zero but I have no idea what these crazy kids will get up to for the next few years.” And that seems to be the actual short-Bitcoin thesis. If your thesis is “Bitcoin will go to zero in a month” then, sure, go ahead, short the futures, but I have trouble believing that there’s much money staked on that thesis. It seems a little nervewracking, you know?