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Macro Factors, Technical Analysis, On-Chain Support Have Grim Outlooks For Cryptos; Does That Make It Worth A Short?

Thursday, May 19, 2022 12:53 PM | Nick Dey
Macro Factors, Technical Analysis, On-Chain Support Have Grim Outlooks For Cryptos; Does That Make It Worth A Short?

As cryptos continue to show weakness in 2022, some investors may be looking to profit from the miseries of others.

Making all-or-nothing bets against the goodwill of any asset is risky business, and cryptos are no exception.

What is Shorting?

Short selling is a strategy that investors use when they are pessimistic about the future price of an asset. If you have a really strong feeling that its price is heading down, perhaps after an extended runup or due to poor economic conditions, then this could be an option to explore.

Shorting is when an investor borrows the stock, crypto, or other asset and then sells it at market price. The short seller then buys the asset back at a later date, returning the asset to the lender. Since after selling the borrowed asset, its price could technically rise to infinity, the risk is technically unlimited as you could be stuck purchasing it back at a much higher price. The max profit is also capped, as it can only far as low as $0.

Should you Short Cryptos?

When we are talking about something as volatile and retail-driven as cryptos, it can’t be underscored enough just how much risk is involved in shorting it.

There is constant speculation against cryptos - no matter how good the market is. But even by crypto standards, there are a lot of warning signs.

With cryptos maintaining a high correlation with the Nasdaq, they end up being more of a speculative bet rather than a hedge against inflation. While the latest inflation readings may have suggested that peak inflation is behind us, “peak tightening” could be yet to come. With fears continuing to mount that the Fed’s work to tamp down inflation will put the economy in a recession, macro factors could continue to weigh on cryptos for some time.

While overarching risks may not look good, what about the charts? Well, if you’ve watched the market at all lately, you’d know it's pretty bad.

Josh Olszewicz, head of research at Valkyrie Investments, noted that he is getting a bearish reading from Bollinger bands - a popular indicator - derived from the moving average over the past 20 trading periods.

Olszewicz noted three things from his Bitcoin analysis: volatility has rarely declined to this level since 2011, volatility does not usually fall much further before a volatility expansion, and whenever volatility has fallen this much, it has always exploded soon enough.

But those are such traditional finance fears, what does DeFi think? Well, on-chain analysis doesn’t have great outlook for cryptos either.

Popular chain analysis company Whalemap tracks activity by “Whales” (people with between 10 and 100 Bitcoins) and other cohorts. The prices that whales add cryptos have historically proven to be a point of long-term price support. This band is currently set between $25,000 and $27,000.

So Short?

Logic and history tell you that cryptos still have a good bit of room to fall and that it could be pretty likely that it does. But this is a space that has only operated in recent history and tends to defy logic when given the chance.

So, as John Maynard Keynes (may have) put it; “The market can remain irrational longer than you can remain solvent.”

But, for those with an appetite for risk that feel strongly that any-to-all of those (and other) bearish narratives in the crypto market are right, then there are more than enough crypto exchanges that will let you.

If you’d rather avoid having to use a DeFi platform, you can short futures traded on the Chicago Mercantile Exchange.

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