The long and the short of it
- Economists get upset when the media describe a rising market as "good", or a falling market as "bad". An asset price moving towards fair economic value is good. An asset price moving away from fair economic value is bad. Up and down do not matter.
- The idea "up is good, down is bad" is dangerous. It encourages governments to ban naked shorts (selling an asset one does not own) but allow naked longs (buying an asset with borrowed money).
- Until now, cryptocurrencies have been biased by "up is good" thinking. People can borrow to go long a cryptocurrency. People cannot easily short a cryptocurrency. With the introduction of futures contracts on 10 December, that bias will be lost. People will be able to short cryptocurrencies by proxy.
- Should investors bet against the bubble? That is high risk.
- UBS believes cryptocurrencies are a bubble. However, being able to short a bubble does not make the bubble burst at once. Cash settled futures contracts on tulip bulbs began in Holland in 1636. The tulip bubble did not burst until February 1637. Bubbles are by definition irrational. Predicting when a bubble will burst cannot use rational analysis. Ignoring a bubble is the best course of action.