Should You Short Crypto Stocks? Crypto Market Sinks Deeper

The cryptocurrency landscape has changed a lot in the months since Coinbase spent at least $13 million for a 60-second commercial slot on Super Bowl Sunday in February. In the past five days alone, bitcoin (BTC) is down by more than a quarter of its value, with altcoins and other digital assets following similar patterns.

Should you bet on crypto tanking further by shorting crypto stocks? Here’s what that means, plus how to know if it’s a good idea for you.

Short selling is the act of investing in an asset to profit off of its fall. Investors can do this through options and futures trading derivatives (puts bet on the price going down, while calls bet on the price going up).

David Neuhauser is the founder and chief investment officer of events-driven hedge fund Livermore Partners. Neuhauser held or continues to hold short positions on MicroStrategy (MSTR) and Coinbase (COIN). Stock for Microstrategy (a software company heavily invested in bitcoin) is down 72.32 percent YTD as of June 14, while stock for major crypto exchange Coinbase is down 79.95 percent during the same timeframe.

Why did Neuhauser feel so confident in short selling these crypto stocks? Because of record-high inflation and increasing Federal Reserve interest rates. According to Neuhauser, cryptocurrency and crypto-related stocks were likely to be hit hard by the squeezed economic environment.

“Bitcoin looked to be one of those pressure points. And essentially that’s why we implemented [the short positions] at that time, because if rates keep going up, things like bitcoin that have no true intrinsic value and no earnings power behind them — there’s only one place to go, which is down,” Neuhauser said.

Crypto is a highly volatile market, especially now since the stock market is also struggling. Experts expect crypto prices to sink further and publicly traded crypto companies to feel the heat as a potential recession approaches. There's definitely an opportunity in shorting crypto stocks.

However, investors should research shorting stocks before deciding to pursue short selling themselves. In regards to options trading, you should be able to pass a test that a brokerage gives you before proceeding with puts or calls.

Even if you know what you’re doing, there’s still some risk in shorting crypto. Short squeezers are entering the market to protect their assets. TRON founder Justin Sun deployed $2 billion through his decentralized autonomous organization (DAO) to help fight Binance short positions. Just know that there are players on both sides of the table at all times (even when it seems like everyone is escaping).

Before initiating crypto shorts, ask yourself:

• Do you have a decent understanding of trading derivatives like short selling, options, and futures?

• Are you trading with your own money and avoiding a margin account that could put you in debt if you lose money on the trade?

• Did you do your due diligence on all individual stocks that you plan to short, including financials and micro and macro-economic factors?

All things considered, shorting rocky crypto companies could be very lucrative. Just make sure you know what you’re doing.