Has there ever been a good way to short bitcoin? I'm guessing not, otherwise it never would've reached such ridiculous prices. I think I'd bet real money on it going below $100.
Lets say you borrowed 1BTC from FTX exchange so that you can short BTC. Congrats, you're correct! You're technically worth a lot more US-dollars now.
You go to FTX, and it stopped existing today. So you don't get your money. In fact, it turns out that you never had borrowed 1BTC in the first place, because FTX where you handled this whole concept has stopped existing entirely.
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You can only do things like "short" something if the bank you're shorting with still exists by the end of it all.
You can't win this at all. You _MUST_ have trust with somebody to do any kind of financial trade (be it a long, or short, or any other such complex trade). If that trust is broken, everything collapses.
If the exchange is doing it's job properly, it would ensure there's a long position for every short position. It's the trader/market maker on the other side that pays you. The premium is what attracts your counter party to the trade.
In the case of FTX, there wasn't a problem with the counter party, it was a problem with the exchange playing with the customer deposits that should have been left untouched.
You need that if you're long, unless you have ownership [almost always true...] in which case you can just close out your long position on some other exchange. You don't need it if you're short, because you get your payout immediately when you go short; closing out a short position is always a loss for you. (You profit when the loss from closing the short is smaller than the gain you got when you took the position. If you never need to close it at all, that's the best-case scenario for your short position.)
I don't know of any exchange that would let you withdraw premium before the short position was closed/expired. If you thought that happened once before, it's only because you are using margin collateralized with other assets on that exchange.
I have two questions, because unlike with the other crypto drama, I'm late to this party.
1. Is that actually what happened?
2. If the answer to #1 is yes, why does this still keep happening? We're in 2022, how many times has this played out, already?
Yes, this is our best guess based on all current facts.
https://www.bloomberg.com/opinion/articles/2022-11-09/bankma...
"The problem is that FTX took its customers’ money and traded it for a pile of magic beans, and now the beans are worthless and there’s a huge hole in the balance sheet."
>2. If the answer to #1 is yes, why does this still keep happening? We're in 2022, how many times has this played out, already?
This is a common occurrence during bear markets. The non-US crypto exchanges are (self|minimally|un)regulated. FTX is the biggest blow-up, and surprised many experienced people.
As Warren Buffet says: “It's only when the tide goes out that you learn who's been swimming naked.”
It's also rumored that FTX/Alameda were hit hard by the LUNA/Terra collapse early this year. They may have tried to cover it by manipulating the tokens they control, and trading with customer deposits.
It's not unique to crypto. LME (London Metals Exchange) had an issue this year with someone short nickel that didn't want to payout. Also, Archegos capital ran up much more leverage than they should, which resulted in loses at several prime brokers. This was due to the brokers not margin calling them sooner. Credit Suisse had to close their broker services unit afterwards.
Why does that guy trust you to return the BTC later?
You don't need an exchange per se. But both people need to trust each other. In the stock market, cleaning houses serve as the central role of trust (and brokerages pass your money/stock to these cleaning houses).
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It goes like this: if you don't return the stock, the clearinghouse will return the stock. If the other guy doesn't return the money, the clearinghouse makes it whole again.
Since the clearinghouse is well trusted, everyone is happy with the trust issue. Otherwise, you have no reason to trust random people on the internet with your $15,000+ bets.
> You go to FTX, and it stopped existing today. So you don't get your money.
What? That's not how shorting works. If you borrow 1BTC from FTX so that you can short BTC, you then actually perform the short by selling the 1BTC to some other party. Now you have two things: (1) cash; and (2) an obligation denominated in bitcoin. That is what it means to be short.
As soon as FTX stops existing, that's great for you, because it means you don't need to give them their 1BTC back. You got your money a long time ago.
1. You never got the BTC to begin with. Its on FTX's platform, with a little database entry that says "User Bob has -1 BTC on margin on the books".
2. The cash never leaves FTX platform either. Because FTX needs to "margin call" (aka: grab your assets somehow) if the market moves against the short position.
3. So really, you're trusting that FTX is going to give you the money back eventually when you zero out all your position entirely.
4. Also remember: exchanges regularly grab the assets. So its not really FTX's bitcoin either. They probably took it from Alice to lend to you.
5. If you wanna say "Well, why doesn't Bob go to Alice directly for this transaction??", its because Alice doesn't trust Bob, and Bob has no trust of Alice, so the entire scheme would never work.
If you thought a fraudulent non-US centralized exchange blowing up would cause it to drop below $100, you may not know anything about bitcoin.
If you doubt bitcoin's future, there is a way to put your money where you mouth is without having to trust anyone a mutual fund wouldn't.
Makes me wonder who wants to hedge bitcoins?
This is probably not a good time though. See https://www.blockchaincenter.net/en/bitcoin-rainbow-chart/
Ironically I was short Celcius Networks token (CEL) on ftx which was working well apart from one recent unexpected flaw in my scheme.
I've written about it a couple times.
https://paulbutler.org/2022/the-problem-with-bitcoin-miners/ https://paulbutler.org/2021/betting-against-bitcoin/