Should I Short Bitcoin?

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Includes: BTC-USD, BTCS, COIN, GBTC, JPM, MSFT
by: Short Only
Summary

Bitcoin is hard to short, but shorting the asset is possible - it is increasingly looking like a good idea.

Bitcoin has fundamental catalysts for downside.

The currency suffers from scaling problems and competition from faster alternatives like Ethereum.

First off, shorting Bitcoin (COIN) isn't the easiest thing to do. There are several exchange-traded products that loosely track its value: BTCS Inc. (OTCQB:BTCS), The Bitcoin Investment Trust (OTCQX:GBTC), and others. But most of these are over the counter, thinly-traded or both. There are several crypto exchanges that offer the ability to short the asset through crowed-sourced leverage, but this option is restricted in some geographies.

Regardless of the difficulties involved in shorting Bitcoin, it can be done. The only question left is whether or not it should be done. In my opinion, the answer to this question is a cautious yes. Bitcoin has scaling issues and conflicting interests may hinder the resolution of this problem. Bitcoin's fundamental value as a medium of exchange is under threat, and alternatives like Ethereum may take its market share.

Technical and Speculative Factors

The nature of cryptocurrency investment necessitates some attention be given to speculative factors like technical analysis and chart reading. Despite the subjective nature of such analysis, it shouldn't be controversial to assert that Bitcoin faces strong resistance at the price of $3,000. Bitcoin's price has fallen sharply on several occasions after approaching this benchmark.

The problem is that Bitcoin's commercial use is growing along with its price. Many investors see crypto as a speculative asset class with little fundamental support, but this isn't necessarily the case. Bitcoin's transaction volume (fundamental demand) is linked to its price because when the value of Bitcoin goes up, its purchasing power follows. And holders of the asset often use it to purchase less volatile assets like gold, gift cards, and even cash - done through "cash out" services on the dark web.

Bitcoin's continual failure to break past $3,000 may not be due to speculative failures alone. It may actually be a sign of limits on scalability. As the asset's transaction volume increases, so do fees. And the speed of the network reduces because of its large backlog.

According to Coindesk, there are conflicting interests seeking to "steer discourse and development" in a situation the writer called a "digital Cuban Missile Crisis." - Possible exaggeration aside, this is a serious problem because there is disagreement about how best to resolve Bitcoin's scalability issues with users divided between something called Segregated Witness "SEGWIT" and a User-Activated Soft Fork "UASF".

Getting into the specifics of these two options would distract from the investment thesis of this article, but the key point is that Bitcoin is losing its status as a fluid, non-political, decentralized means of conducting business online. And Ethereum, its biggest competitor does not have the same issues with scaling and transaction speed. Ethereum has also gained some mainstream adoption via the Ethereum Alliance which includes many Fortune 500 members like JPMorgan Chase (NYSE:JPM), and Microsoft (NASDAQ:MSFT).

Conclusion

There is no such thing as a perfect investment thesis, and this thesis has risks. Bitcoin is an extremely volatile asset, and because shorting involves borrowing, theoretical losses are infinite. Even though Bitcoin has issues in scalability, shorting the asset may end up being riskier than buying it. Investing in Ethereum may prove to be a better alternative than shorting Bitcoin as the smaller cryptocurrency looks likely to continue taking Bitcoin's market share.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Editor's Note: This article covers one or more microcap stocks. Please be aware of the risks associated with these stocks.