Shorting Bitcoin - is there any benefit to diversification and shorting other currencies?

Brendan Burgess

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I have a diversified portfolio of shares. No matter how good I think a company might be, I would not invest more than 10% of my assets. When a share increase to more than that, I usually sell it down to reduce my exposure.

I will be shorting Bitcoin. I will allocate about 1% of my portfolio because it's so volatile. If I short at $10k, it could rise to $20k and my allocation would be lost.

Is there any benefit in shorting the likes of Ether, XRP and Litecoin? Spreading the 1% over a few cryptos?

While they have tended to rise and fall together, the fall in Ether has been even more pronounced.

Bitcoin is at 50% of its market peak. But Ether is at 10% of its market peak if I am reading the charts correctly.

And would a technical breakthrough in one of them make it more popular than the others and therefore wipe out the others?

I presume that Bitcoin Cash and Bitcoin SV are more closely related to Bitcoin than the other cryptos so they would not act as a diversficiation?

Brendan
 
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CMC has developed its own indices



CMC Markets’ Major Crypto Index will include bitcoin, ripple, bitcoin cash, ethereum and litecoin.



The Emerging Crypto Index is based on dash, EOS, monero, NEO, stellar lumens, cardano and TRON.

Emerging Crypto Index weightings
ComponentNo. of units1Weighting2 (%)
EOS1,040,00034.74
Stellar Lumens21,900,00012.95
Cardano29,700,00013.06
TRON76,200,00012.74
Monero19,10011.30
Dash9,7609.28
NEO74,4006.93



A third index, the All Crypto Index, combines all of the above constituents and uses a bespoke weighting methodology to avoid dominance by any one coin.

All Crypto Index weightings

ComponentNo. of units1Weighting2 (%)
Bitcoin20112.00
Ethereum9,13212.00
Ripple7,640,73712.00
Bitcoin Cash5,55212.00
Litecoin31,53112.00
EOS261,7185.71
Stellar Lumens14,361,6475.71
Cardano19,307,2575.71
TRON50,805,9945.71
Monero14,3565.71
Dash8,9295.71
NEO91,1765.71
 

QTUM current price, 1.70....ouch that must have hurt watching the price fall.

@Brendan Burgess I don't believe it to make sense to short other Cryptos in your situation. I say this because you believe the market to be irrational (I am not disagreeing), but why would you want to increase your exposure to more digital assets in an irrational market? As you noted you could short bitcoin at 10k and the price could rise to 20k. You could also short the other currencies at their current levels and they could increase, you are just betting on 10 movements instead of one. I think it is simpler to keep your 1% shorting BTC rather than dividing it.
 
Hi Dublin Bay

I have clarified my initial post.

Let's say I want to short €1,000 worth of Bitcoin.

I am trying to figure out if it makes more sense to short €100 worth of 10 coins.

Or short the index.

So I am not increasing my exposure, I would keep my total exposure the same. Or if I thought that the diversification was effective,I might increase it to 2% of my portfolio.

I think that they will all go to zero. But if Bitcoin ever works as a medium of exchange and becomes useful, I presume that the others will decline in value.

Likewise, if one of the others has a super technical development which surpasses Bitcoin, maybe it will rise and all the others will fall?

Brendan
 
What about if you transformed the question to remove the confusion of crypto? If you wanted to short Delta Airlines due to Corona virus, would you just short Delta or would you short an airline index (I've no idea if such a thing exists). If you would only short Delta, you could ask yourself do you think there's an inherent linking or domino effect in cryptos that doesn't exist in regular stocks? If so, why do you think this?
 
Hi Boyd

That is the basis of my question. Are the cryptos linked?

I expect that they will all go down together, but at different times.

Airlines have all been hit by Covid. I wouldn't see much point in shorting a basket of them.

But it might make sense to short a diversified basket of stocks.

Brendan
 
Yeah so applying the same logic it would likely make sense to short the All Crypto index you mentioned above, otherwise you're back to predicting individual securities to fall at certain times which is no easier in crypto than it is in common stocks. In fact it's likely to be much harder, since there is no inherent mechanism to value them. To me shorting Delta airlines can be explained, so shorting the index of same also makes sense. Shorting Bitcoin vs Ether seems like a random guess, so again I'd short the index and hope some (or all) of them fall enough to drag down the index.
 
Thinking through the airlines comparison a bit.

Say I think that airlines will be badly hit by Covid. But maybe Ryanair will be hit worse than British Airways. Or vice-versa. So t might well make sense to short the index.

I would be making a call on the industry and not on the individual company.

If I am right, then all airlines should fall. But it's possible that if a few of them go bust, there will be less competition and one or two of them could do well, even in a general turndown.

It would be different if I thought that the future was good for airlines, but that Ryanair was overpriced. In which case, I would short Ryanair.

Brendan
 
So if I believe all cryptos will go to zero...

Maybe one of them will develop something which actually confers a fundamental value on it. It has been suggested to me that one of them might be involved in some genuine business and might give coin owners the right to subscribe to shares in the IPO. I don't fully follow that, but there might be something like that which confers value which I can't anticipate at the moment.

So I could be right in general, that most cryptos all crash towards zero, but unluckily, the one I shorted is actually the one that develops some underlying value.

Brendan
 
Dublinbay12 said:
but why would you want to increase your exposure to more digital assets in an irrational market?
Click to expand...

Irrational markets are more driven by sentiment than others. If you can get an objective view of how that sentiment ebbs and flows over time, you might call it more accurately than a stock where you need insight into company performance, the market conditions and the overall sector they operate in along with sentiment.
 
So, I have shorted the All Crypto Index @2896.35

Although it is diversified, it's still very risky shorting anything which is priced irrationally.

While I reckon that the rewards outweigh the risks, I will still limit my losses to 1% of my portfolio.

Brendan
 
Do you have an update on how this is working out for you?
I hope your short didn’t get liquidated

Take care
 
I did the diversified short and it's well under water.

It's a small portion of my overall portfolio and I have funded it well so it won't get liquidated.

Brendan
 
Brendan
I looked back, but couldn’t find/remember how you structured this short bet? Was it a spread bet? I think it was a 10k punt? Was there another thread discussing the mechanism of how you short it. I assume you are still in this trade?
 
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Yes, it was a short of the Major Crypto Index.

So my bet was as follows:


I shorted it at 2905 and it has since risen to 4249. I am down a fair bit, but well within my risk tolerances.

Brendan
 
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