How do you short an asset in #DeFi?
[1/x] 👇 🧵
Let's say you want to short $BTC. Current price is $40k.
1. Borrow 1 $BTC on a lending platform like @HundredFinance (0% APR)
2. Immediately sell the borrowed $BTC for $40k $USDC.
(Can do this with any amount, just using round numbers for the example)
Case 1: $BTC goes to $20k
• You have a loan of 1 BTC ($20k)
• But you have $40k in $USDC.
After paying back the loan, profit = $20k.
Case 2: $BTC goes to $60k
• You have a loan of 1 BTC ($60k)
• But you only have $40k in $USDC.
• You now need to put in an extra $20k to pay back the loan.
After paying back the loan, loss = $20k.
This is how shorting works.
Your debt is denominated in the asset you are shorting ($BTC in this case).
Therefore, you want the asset ($BTC) price to go down, so that your debt goes down as well.
Some lending / borrowing platforms you can use:
• @HundredFinance (FTM / ETH / ONE / MOVR / Arbitrum / Optimism)
• @screamdotsh (FTM)
• @AaveAave (ETH)
• @ibdotxyz (FTM / ETH / AVAX)
• @EdgeProtocol (Terra)
• @traderjoe_xyz (AVAX)
Important note:
In order to borrow assets in #DeFi, you have to deposit collateral to the platform worth more than the borrowed amount.
Remember that there is an opportunity cost of the collateral you deposit.
Example:
• You deposit $1000 of $USDC as collateral (earning 5%)
• You borrow $500 of $ETH (2% APR) and sell for $UST (earning 20%)
Annually, you are:
• Earning $50 ($1000 @ 5%)
• Earning $100 ($500 @ 20%)
• Paying $10 ($500 @ 2%)
= $140 on a $1,000 investment
= 14%
If the price of ETH does not change, you are earning 14%.
But your opportunity cost is at least 19.5% on @anchor_protocol.
When you factor that in, 14% doesn't look too attractive.
You also lose if $ETH goes up in price, and you face risk of liquidation.
There are also transaction costs (gas fees, bridging costs, slippage, taxes, etc) - these can be significant depending on your strategy.
Make sure to factor in tx costs when planning.
Here are some ways to mitigate transaction costs.
twitter.com/shivsakhuja/status/1487715969594126337
You might want to short #crypto if:
1. You're bearish on the market
2. You want to employ a market neutral strategy
3. You want to reduce your exposure to crypto / hedge temporarily
Here's a thread I wrote about market neutral strategies.
The actual strategies in this thread are outdated now, but the principles are the same.
twitter.com/shivsakhuja/status/1472295930023997441?s=20
You can also short #crypto using options / futures, but those topics deserve their own threads 🧵.
Hope this thread helped explain how the mechanism of shorting works in #crypto.
I don't recommend shorting unless you're sure of what you're doing.
For that matter, I'm not recommending anything at all.
I'm just trying to educate and empower people with knowledge of all the financial tools that #DeFi has to offer.
NFA. DYOR.
If you're looking for more #DeFi content, here are my past threads:
twitter.com/shivsakhuja/status/1470898910218440708?s=20
Follow along for more daily #DeFi content.