Thursday, February 22, 2024

Setting short-selling straight; or, "But who let you short that?"

You might not be aware, but I've been short-selling some cryptocurrencies. (I would have said "been making money short-selling cryptocurrencies", but ...)

Often people ask some from of, "oh wow, what broker lets you do that?" It's actually an interesting misunderstanding, in that it misses a key insight:

You can short-sell any time you have a debt denominated in that asset.

At that point, you are short the asset. You benefit from anything that makes that asset easier to obtain, and thus extinguish your debt.

In the decentralized finance world, there are platforms (in my case, Compound.finance) that let you deposit some crypto asset A, and borrow some other crypto asset B. Once you do so, and sell B, you are now short-selling B!

The concept applies more generally too: for example, if you owe your friend the favor of helping them move, then you are "short moving services" (because anything that makes moving services cheap, also makes your debt easier to service, at least because you have the option to satisfying by paying a service rather than doing it yourself).

Also, if you borrow US dollars, and spend them, you are "shorting the dollar", although it's usually not talked about in these terms. (You hold a debt denominated in dollars, after having "sold" them for something else, which we generally refer to as "buying".) Although, there was an interesting case where people would borrow USDC (a crypto dollar substitute) and then find out they could be bought back for less than a dollar during the Silicon Valley Bank collapse. Thus making them "accidental short-sellers"!

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