Jordi Alexander

Shorting is a dark art- suitable only for the most elite of trading wizards.

You pay ongoing borrow costs in a war of attrition, for limited upside, all whilst taking on risk of liquidation- no matter how big your bankroll is!

The game theory lens is particularly interesting 🧵 

When you want to buy and bet on a price going up, it is relatively simple:

Predict others will buy after you and profit. You can advertise the position you took, and get a network effect. 

You risk only what you put in.

You are creating paper wealth so noone hates on you..

The reverse is not true when you short.

Timing is against you, cannot wait forever like you can when you buy. The borrow costs can eat you up.

The squeeze is always possible, even if you are fundamentally correct.

Publicize and get attacked as you are net-net decreasing Mcap..

Most importantly- getting others to naked short doesn't actually help your cause much.

In fact it can worsen the short-squeeze dynamic if those people have to paperhand the short and buy back because they didnt size it correctly.

To win, the HOLDERS are the ones who must sell.

The key thing to understand when shorting is this lesson from game theory-

If the holders coordinate and don't sell, you are screwed no matter what. Doesn't matter if the thing is clearly worthless- you are dead.

Ergo, to win, you must see the chink in their coordination armor. 

What you come to realize is this dark art is less about fundamental analysis, and more about psychology and getting an intuition for timing.

If things are going well, price is going up, the holders are feeling validated. They are probably in chat rooms and discords high fiving..

There is the base of spot holders. If they are strong hands, that gives a solid spot for leverage traders and OOM call option buyers to stand and shoot it even further. 

As we have seen since GME and DOGE, things can get pretty redacted fast.

For a short-seller, the most powerful weapons in our  arsenal are:

1. GREED leading to profit-taking
2. BOREDOM leading to rotation for action
3. DESPAIR leading to loss-cutting

Lets examine these three fiery arrows in our quiver.. 

1. Greed 🤑

Price runs up, longs get wealthier (on paper!). Short-squeezes adding fuel to the communal fire!

At some point though, the game turns from Longs vs Shorts to PvP.

They are sitting around watching a balloon inflate, but only those who pop it first keep the bounty..

Eventually, even the most loyal community member realizes their individual optimal move is to pop that baby and cashout the loot!

The community of holders start like a family, but as individuals they have their own famiglias to think of.

Look for the greed point of no return.. 

To identify the inflection point check that there are whale holders who have made very meaningful $$.

Then look for momentum stalling on price. While the fire is on full steam everyone is too drunk on profits to consider the downside.

After the first meaningful price drop, even if it recovers after, it is now in the whales' recent memory that this can all evaporate too- creating a doubt in their conviction.

e.g. $100k-&gt; $1m, down to 700k and that 300k loss will shake em up- 

Greed with a sprinkle of fear.. 

2. BOREDOM 🥱

Ultimately, those participating in bubble expansions are by their nature action junkies. 

If price isn't high enough to create a meaningful greedy exit (or maybe those initial sellers already cashed out).

The action junkies start itching for a better time.. 

Boredom is not the Explosive Arrow that is heard-round-the-world like the Greed one.

It is a Poison-Tip, slowly infecting the holder group and draining the market cap.

The price fall is still as steep, but it can take many months to play out as apes patience levels vary. 

Fighting a Boredom wall takes a lot of stamina and ability to lock up capital for a long time.

Its important to find a decent funding rate (future curve inversion), and be patient to suck out the entire risk/reward on offer.

The boredom face-off is a very challenging game for a shorter, and there are often better bank for their buck on their capital around.

This explains why many coins remain overvalued for indefinite periods. Dino coins for instance. Only play if you know the game you are entering. 

3. DESPAIR 😩 

If the group of whales holding most of the tokens are having a tough time in general, they will often be forced to take whatever price they can get.

If the general macro (for stocks) or crypto (for tokens) are on a downtrend, they will have less ammo to fire..

If you know the opponents doesn't have many bullets left, thats a good time to come out firing- particularly if there are signs of leverage. 

The dark wizards who hunt with Despair Arrows go deep into the Mordor lands of Youtube and TikTok to understand the state of the hordes.. 

Timing is key- when laying siege on a stronghold, it is best to wait until the food supplies are drawing thin inside, and only then launch for a full assault.

This is perhaps the easiest of short trades for aspiring disciples of the Dark Art. When liquidity is dry, fire away.

There is great power to be found in the Dark Spell-book I laid out, but for most participants this should serve as for informational purposes only.

Handle with care frens. 

Till next time. 