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How 'Short' Bitcoin Means the Moon

Posted 18 November 2017 How 'Short' Bitcoin Means the Moon
Written by Jon Gulson @jongulson
'I can hear the crowds coming.' Mike Novogratz

For every cryptocurrency sceptic on Wall Street such as Ray Dalio and Jamie Dimon, there are a growing number of proponents who believe bitcoin and blockchain technology is the future. These include Mike Novogratz, billionaire hedge fund manager who is now reinventing himself as the king of bitcoin. 

This week bitcoin touched $8,000 for the first time and one of the factors behind this rally is Wall Street’s anticipated entry into the markets. Recent news has included the Chicago Mercantile Exchange announcing it will add futures bitcoin contracts to its product offering and Coinbase intending to launch custodial services for institutional investors in cryptocurrency.

Institutional money moves markets and inevitably means more sophisticated financial products, as investors look to benefit from cryptocurrencies volatile dollar price movements both upside and down. A futures contract for example is derived from the price of a commodity, is often leveraged and allows shorting - a contract taken to benefit from falling prices.

Short Squeezes Explained

Short selling means the selling of an asset at today’s price with an agreement to buy back at some point in the future (at a lower price). The risk being if prices rise, losses are suffered as the asset has to be bought back at a higher price than the one initially sold for.

With the example of bitcoin, if the price starts to rise sharply it would mean short positions are liquidated and forced to buy back. When this happens amongst enough short sellers, the price is pushed even higher (a short squeeze).

The reason this could become interesting with bitcoin and cryptocurrency is their very disruptive nature: as with anything new, many people are still trying to make sense of it. And with this, comes the belief it is a bubble (and therefore an opportunity to ‘short’).

As we outlined in a previous blog, bitcoin in itself is not volatile as the technology doesn’t change in nature. The volatility surrounding it is more a condition of the dollar – perhaps an admission it has seen what tomorrow brings? As Mike Novogratz stated in his comment about the herd coming, the technology is gaining adherents who understand the fundamentals and how it will change the basis of money.

When added into this mix the steroids of the institutions, their tremendous financial armoury and target driven traders who pitted against the perfect technology of blockchain – at this point, we could witness ‘short’  bitcoin to the moon!
Written by Jon Gulson @jongulson
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