Market Extra: Forget missing out on bitcoin mania, be glad you didn’t short it

What would be worse than missing out on the outrageous cryptocurrency rally that you dismissed as the next tulip mania? Shorting bitcoin.

The only way to bet against bitcoin so far has been to short it through Grayscale Investment’s Bitcoin Investment Trust fund GBTC, +8.85% and many traders who made such bets are nursing huge losses, according to Ihor Dusaniwsky, managing director for predictive analytics at S3 Partners LLC.

GBTC is an open-ended, unregistered investment vehicle sponsored by Grayscale Investments. The trust holds and derives value from a fixed amount of bitcoins, which are stored at Xapo, a Hong Kong-based firm providing a bitcoin wallet and a cold-storage vault.

On Thursday, the price of GBTC rose 8.5% to $1,818, trading at a 59% premium to its net asset value, or NAV, of $1,150, according to Bloomberg.

Since the start of the year, GBTC is up 1,365%—a more than 10-fold rise. Bitcoin BTCUSD, +21.79% traded at around $16,000 on Thursday, according to Coindesk.com, continuing a sharp run-up into uncharted territory.

Timing is everything

While shorting a rapidly appreciating asset is a surefire way to lose money, it doesn’t mean people can’t benefit from temporary price drops, if timed precisely and correctly.

In September, Andrew Left, founder of Citron Research, who is famous for short bets against companies such as Valeant Pharmaceuticals VRX, +4.63% announced that he was shorting GBTC.

At the time, he said the reason behind shorting the security was due to the discrepancy between its price and NAV, as well as the risky nature of the vehicle due to lack of oversight by regulators.

Left, who said his short position was “very successful”, sees another opportunity to short GBTC now.

“I think the current spike in bitcoin is more due to manipulation and not the free market,” Left said in an email.

Left didn’t reveal the details of his positions, but it is possible to have successfully shorted GBTC from early September, provided the position was closed within two weeks. In September, the GBTC price was at about $800 and was trading at 130% premium to its NAV. GBTC did fall from $800 to $518—a 35% drop, during the first two weeks of September, but recovered by November and went on to rally to $1,818.

A ‘brutal’ year

“One of the main reasons for this premium is that GBTC’s shares outstanding and unrestricted tradable shares haven’t increased appreciably even though demand for the security continues to grow along with its stock price,” said Dusaniwsky.

A $1 million short position in GBTC held since September would have lost about $622,000, according to Dusaniwsky.

“It has been brutal for bitcoin shorts. We estimate shorts are down about $46 million in year-to-date mark-to-market losses, or down 217%,” Dusaniwsky said.

Even if you had a strong conviction and turned out to be right about the timing of the short, high borrowing costs would have limited the gains.

Read: Here’s what bitcoin’s monster 2017 gain looks like in one humongous chart

Because GBTC is owned primarily by retail investors, albeit sophisticated ones (those whose annual income exceeds $200,000 or have assets or more than $1 million), the cost to borrow the stock has been relatively high.

“New shorts are being charged 18.5% because the overall float is relatively small,” Dusaniwsky said.

Dusaniwsky expects short interest and borrowing costs in GBTC to rise to as high as 50% on an annual basis, once new bitcoin futures and ETFs enter the market, expanding available options for investors to have exposure in the digital currency and suppress the existing premium for the GBTC.

Cboe Global Markets Inc. CBOE, +0.63%  plans to launch a bitcoin futures contract Sunday, whiel rival CME Group Inc. CME, -0.01%  is set to launch its own product on Dec. 18.

See also: Bitcoin makes up more than half the $400 billion cryptocurrency market

“While the futures contract will allow easier and safer bitcoin short selling, it will also allow for easier and safer bitcoin long buying. Long GBTC holders may feel the pain of its 59% asset premium shrinking, while short sellers will probably be incurring a 50%-plus stock borrow fee—both sides will be paying a premium in order to ride the bitcoin roller coaster once the Cboe futures start trading,” Dusaniwsky wrote in a note.

Read: Brokers say bitcoin futures contracts ignore risks

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