Institutions Made Millions By Short Selling Bitcoin In 2018
In 2018, there was a slowdown in the cryptomarket and Bitcoin lost over 80% of its peak value. While some people had a disastrous year, there were many who made money by short-selling bitcoins.
Traditionally, short selling is the sale of a security that the seller has borrowed. A short seller profits if a security's price declines. In other words, the trader sells to open the position and expects to buy it back later at a lower price and will keep the difference as a gain. Bitcoin shorting is the act of selling the cryptocurrency in the hope that it falls in value and you can buy it back at a lower price. Traders can then profit from the difference in market price. Short-selling takes the typical mantra of ‘buy low and sell high’ and flips it on its head – while you still buy low and sell high, the trader sells the asset first and buys it back later.
Genesis Global Capital recently published a report saying able to process $1.1 billion USD in lends and borrows last year. Most of it due to the surging short selling of cryptocurrencies, especially Bitcoin, Ethereum and XRP.
“For us, shorting is the riskier type of business so that will determine how much we lend and the terms of the loan,” said Michael Moro, chief executive of Genesis Global Trading. To borrow crypto, funds are needed to post 120% of the sum as security, and depending on their strategy, an interest rate is determined.
Short sellers are, according to Moro, momentum traders. They wait right up until the moment and then do it. He believes that, depending on the market in 2019, people will continue to borrow money in order to shorten their positions if the price remains stable. However, if it goes up, then probably now.
What’s interesting is that short-sellers at one of the biggest spot exchanges, Bitfinex, spread over 40,000 bitcoins in December and CME and CBOE futures contract trade with notably lower volumes.
However, there is some good news to the long term bitcoin bulls. Cash lending is also in demand which lets bitcoin holders use their bitcoins as collateral to loan USD. Genesis says in their report,
“Most clients are using the cash to invest, sometimes even in the same asset they posted as collateral to with most clients.”