Ethereum Skeptics Will Be Able To Short The Token On Andreessen Funded dYdX
It has been a recent trend among many crypto investors for shorting Ethereum due to their lack of strong conviction in its potential to scale and increase its network capacity. Now, dYdX, a decentralized financial derivatives startup is providing a way to do so.
dYdX recently closed a $2 million seed round led by Andreessen Horowitz and Polychain and joined by Kindred and Abstract plus angels, including Coinbase CEO Brian Armstrong and co-founder Fred Ehrsam, and serial investor Elad Gil.
How will it work?
The idea is that you buy the short Ethereum token with ETH or a stable coin from an exchange or dYdX. The short Ethereum’s token price is inversely pegged to ETH, so it goes up in value when ETH goes down and vice versa. You can then sell the short Ethereum token for a profit if you correctly predicted an ETH price drop.
On the back end, lenders earn an interest rate by providing ETH as collateral locked into smart contracts that back up the short Ethereum tokens. Only a small number of actors have to work with the smart contract to mint or close the short Tokens. Meanwhile, dYdX also offers leveraged Ethereum tokens that let investors borrow to boost their profits if ETH’s price goes up.
The company’s plan is to offer short and leveraged tokens for any ERC20 currency in the future. dYdX is building its own user-facing application for buying the tokens, but is also partnering with exchanges to offer the margin tokens “where people are already trading.”
Institutional Investors Not A Fan Of Ethereum
Tetras Capital, a crypto-oriented hedge fund headquartered in New York, is one of those shorting Ether. They published a report saying:
“We believe that ETH’s current price is still significantly overvalued; still significantly decoupled from the Ethereum network’s current and near-term technological state. Our research has led us to believe that the market and technology is still far too immature to justify current valuations. This nascent asset class has taken off due to speculative narratives, and we believe that the current marketplace is not sophisticated enough to properly evaluate risks or general economic concerns.”
Hidden Hand Capital from San Francisco is also bearish on Ethereum and has already opened short positions on Ether. The company, which manages about $100 million in crypto assets, is the family office of Timothy Young – the entrepreneur who sold tech venture Socialcast for over $100 million seven years ago.
Sunnarborg of Tetras Capital summarize the problem with these words:
“In the long term, I think they’ll solve a lot of scaling challenges. But in the short term, there’s a disconnect between the price and underlying technology. Just because something is a good idea doesn’t mean it’s a good investment.”