If you thought the launch of futures trading and the ability to short bitcoin would put the brakes on the cryptocurrency’s dizzying rally, the experience on the first day of trading suggests nothing of the sort is on the cards.

The bitcoin frenzy continued unabated, rallying as much as 26% on Cboe Global Markets Inc.’s exchange and triggering two temporary trading halts in the process . At the rate at which bitcoin is zooming, a moot point is who would want to build a meaningful short position in the currency. It’s been acknowledged for years now that shorting bubbles isn’t a great idea. As John Maynard Keynes’s said famously, “The market can remain irrational longer than you remain solvent."

In a similar vein, Katsunori Sago, chief investment officer of Japan Post Bank, told Reuters last month, “Since no one knows when the (bitcoin) bubble will burst, the best thing to do here is to stay away from it." Sago said the fair value of bitcoin should be $100 or 99% lower than its prevailing price.

It must be noted here that holding on to a short position can result in far greater losses when compared to a long position, thereby adding to the reluctance of traders when it comes to shorting. When you buy a bitcoin for $15,000, your maximum loss is limited to that amount; in contrast, a short position can result in higher losses if the currency rallies to, let’s say, $50,000.

Some commentators have argued that options on bitcoins can help facilitate more short positions, compared to futures contracts, where margin calls can become unmanageable. For perspective, Cboe has demanded a 44% margin to trade bitcoin futures, given its extreme volatility. Based on the rally on the first day, the margin posted with a short futures position will be wiped out in two days. But given the extremely high volatility, even options writers will demand a very high premium, and more so with contracts with a longer duration. Writing options involves the same risk as selling futures, although it is true that a liquid options market can facilitate a far greater variety of views, suiting various risk appetites. Bloomberg has listed a number of other ways to short bitcoin.

But while there may already be many avenues to short the digital currency, rational investors are likely to pay heed to Keynes’s warning, while some may even take a step further and act on the trading tip inherent in his statement. Researchers Markus K. Brunnermeier of Princeton University and Stefan Nagel of Stanford University point out that sophisticated investors preferred to ride the tech bubble in the late 1990s, rather than attack it. They say in their well-known paper, Hedge Funds and the Technology Bubble , “The efficient market hypothesis is based on the presumption that rational investors prevent price bubbles by trading against mispricing... We find that hedge funds were riding the technology bubble, not attacking it. (Also), hedge funds reduced their holdings before prices collapsed... Under these conditions, riding a price bubble for a while can be the optimal strategy for rational investors."

In the current context, the launch of bitcoin futures on established exchanges may well help some investors join the bandwagon, rather than lead to any meaningful correction. For those who are sceptical about the rally, the best bet seems to be, as Sago says, to stay away.

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