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The Silent Screams of the Bitcoin Shorts

If bitcoin were a standard commodity or securities instrument, headlines would be screaming about how the “shorts” were being squeezed. With bitcoin in a parabolic price rise, some calling it a mania, there are no shorts to scream bloody murder.

Many commodities and companies have key constituents who apply political pressure when futures markets are moving so sharply that common sense tells you there is something wrong or unbalanced happening in the market.

Sometimes rules are changed or obscure procedures exercised at futures exchanges in order to accommodate an orderly liquidation of positions in cases where the powers that be can’t take the political heat anymore.

However, bitcoin is unlike other commonly traded markets because of its asymmetrical feature. There is little ability to short (physical?) bitcoin, so there are no shorts to squeeze.

This will change when futures markets at CME Group, Cboe and Nasdaq are introduced. A key element of futures trading is the ability to go long or short. However, these new instruments will not change the nearly asymmetrical underlying economic purpose of bitcoin.

The only true players in bitcoin or other cryptocurrencies are the miners. They have production that needs to be hedged, or sold for a profit. The natural longs are those choosing to use bitcoin as a credit default swap against a local currency, or for nefarious means of exchange. Gold has traditionally played the credit default role.

This brings up the question of who will step into the market with a strong bid and create a market clearing price, absorbing all the accumulated selling, when the inevitable break comes.

Who will catch the falling knife when the bitcoin market breaks? While bitcoins represent unique technology innovations, they do not rescind certain market truths. One is that markets fall faster than they go up. Given how fast bitcoin has gone up this year, going down faster risks being abnormally fast.

Do the bitcoin exchanges have the technological capacity to handle the volumes when the inevitable heavy volume break occurs?

One common theory about what will cause the bitcoin price to break is concern about the genesis block, the untouched bitcoin first mined by the anonymous Satoshi Nakamoto. Should some of this purported 1 million bitcoin block trade, that will be the sign for many that the top is in and it is time to get out.

The risk is that as the price of bitcoin rises, the pressure on whoever controls the genesis block will keep increasing to book some profits. At $10,000 per bitcoin, this is $10 billion. It is only common sense to take some money off the board and diversify. Even 100-billionaire Jeff Bezos took profits of $1.1 billion in Amazon stock late last month.

In the meantime, bitcoin will continue to rise as the number of people increase in this asymmetrical over-the-counter market. Interest is growing rapidly, which is why the futures exchanges want in on the action. Adding millennial bitcoin enthusiasts as customers opens futures exchanges to a new generation of traders.

How many people will get hurt by a break in bitcoin? It depends if bitcoin owners get out, and where they get out. Many bitcoin enthusiasts seem to have the long-term investment horizon tenacity of gold bugs.

When will the break in bitcoin prices occur? It is simple. The break will happen when we run out of buyers. The next issue will be when will the price break stop? Simple: when we run out of sellers, just like in every big and fast break we have seen before.

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About Author

Lothian is executive chairman of John J. Lothian & Co. and editor of the John Lothian Newsletter. He publishes MarketsWiki.com, MarketsReformWiki.com, MarketsWikiEducation.com, JohnLothianNews.com and several industry newsletters.