The Risks and Rewards of Shorting

Limitations of Shorting

From a theoretical perspective, the upper limit of profit from shorting is 100%, while the potential loss can be unlimited. In contrast, the maximum loss from going long is 100%, but the profit potential is unlimited. This asymmetric risk-reward structure puts shorting at a disadvantage in long-term investments.

Despite some believing that shorting may not be as bad as it seems due to the trend of many projects in the cryptocurrency market having intrinsic value decline, frequent shorting may bring some negative effects:

1. Distorted mindset: Long-term focus on negative market factors may lead investors to doubt and harbor hostility towards the entire industry.

2. Losing faith: Overly focusing on short-term price declines may cause investors to overlook long-term development prospects.

3. High-risk behavior: Emotion-driven actions may lead investors to make irrational decisions, such as attempting to shorting mainstream assets like Bitcoin.

Insights from the Luna Incident

The 2022 Luna project collapse event brought significant profits to shorting, but such cases are rare. During the process of Luna rising from less than 1 dollar to 120 dollars, shorters incurred heavy losses. Therefore, one should not focus solely on individual success stories while ignoring the overall risks.

A relatively safer shorting strategy is to operate on stablecoins. For example, shorting the UST stablecoin during the Luna crisis theoretically leads to a maximum loss of less than 10%, while the potential profit can reach 90%. However, such opportunities are not common in the market.

Avoid Habitual Shorting

The market occasionally experiences anomalies like TRB, which skyrockets several times in a short period without clear fundamental support. Such extreme market conditions can instantly wipe out the funds of shorting traders.

Overall, unless for hedging purposes, frequent shorting operations are not recommended. In a bear market, being patient and taking a wait-and-see approach may be a wiser choice. Some potential gains, even if given up, can still be a rational decision.

In the long term, the global trend of continuous monetary issuance and the historical rise of Bitcoin are not conducive to the sustained success of shorting strategies. Investors should remain clear-headed and avoid being misled by short-term market fluctuations.