Short crypto positions are causing mayhem right now. The sudden drop in Bitcoin prices, to the tune of 50 percent, has once again bought to for the dangers of endless crypto shorting. As short traders take charge amidst the coronavirus market scare, the rapidly depleting cryptocurrencies are suffering the most. Should the exchanges allow such significant short crypto positions? Let’s find out.
Short crypto positions amplify flash crashes
Bitcoin prices have dropped around 50 percent since last week and currently hover approximately $6,000 mark due to COVID-19 fears. The massive short trading carnage engulfed every cryptocurrency. Last Thursday, $1 billion worth of long crypto positions were hammered, resulting in colossal losses. The very existence of leveraged crypto derivatives market was questioned. Many exchanges introduced circuit breakers to limit the fall and regulate abrupt trading behavior.
Prominent exchanges like OKEx, Binance, and BitMex are the primary crypto trading hotspots. Their trading trends suggest that leveraged trading is creating a lopsided impact on cryptocurrency prices. Such unchecked trading features can cause considerable disruptions in times of flash crash. As per Datamish, approximately one-third of BTC margin trading positions consist of shorts, and most of these are hedged. Markets can be stabilized a lot faster if these short crypto positions are regulated. But is it feasible?
Should short crypto positions be banned altogether?
The exact impact of banning short positions on cryptocurrencies and traditional assets is debatable as a desirable outcome is a dependant on a lot of factors. Crypto exchanges and trading activity is spread over various countries, which poses jurisdictional challenges. Thus, enacting laws in one country won’t do as coherence simply won’t be achieved.
Industry-wide guidelines and rules must be framed to remove market distortions. Coherence among the exchanges is another factor that must be sorted before introducing such bans. Otherwise, the disparity can be used by short traders to exploit arbitrage opportunities. Healthy shorting is required to maintain pressure on the abrupt price rises. Banning short crypto positions may help during such volatile times, but it can stunt the evolutionary growth of crypto assets.