Want to bet against bitcoin? It's not so easy

Betting that a security's price will fall, known as selling short, is risky under the best of circumstances. And it's even more challenging for investors brave -- or foolhardy -- enough to take a stand against the surging price of bitcoin. Nonetheless, some people appear willing to give it a shot.

Roughly half the bitcoin futures traded on TradeStation are short sales, according to Nick LaMaina, the Plantation, Florida-based company's senior vice president for brokerage services. The contracts began trading Sunday. Also, short interest in Greyscale Bitcoin Investment Trust (GBTC), the only fund tethered to the price of bitcoin, has risen from 30,428 shares as of June 30, 2017, to 47,886 as of Nov. 15, according to OTCMarkets.com.

Still, investors eager to make a contrarian bet against bitcoin -- whose price has surged more than 15-fold since January -- will find it's not so easy.

Brokerages, such as Charles Schwab (SCHW) and TD Ameritrade (AMTD) either aren't participating in the market because of its volatility or are placing roadblocks on those who do. Interactive Brokers now allows short sales of bitcoins after first prohibiting them.

In a statement, Schwab notes that cryptocurrency trading "is an emerging area of finance and important protections normally associated with legal tender currency are still lacking." The company is reviewing bitcoin futures so that it can protect its clients' interests before making the contracts available. TD Ameritrade, which is also reportedly avoiding bitcoin futures, didn't  respond to a request for comment.

Other institutions, such as Wells Fargo (WFC), are also staying on the sidelines. A spokesman for the San Francisco-based bank said it won't recommend or facilitate the purchase of cryptocurrencies, won't accept them as collateral for a loan or deposit them into any accounts.  

"Given the extreme volatility for the price of bitcoin, especially in the last few months, it's not surprising that certain futures brokers will not allow retail clients to take the short position in a bitcoin futures contract," said Blake Estes, an attorney with Alston & Bird's Financial Services & Products practice, in an email. "The short side of these trades bears a significant amount of risk with recent double-digit percentage intraday price swings for bitcoin."

Estes added that "even with sizable margin requirements and limitations on contract size, the risk of default by a retail investor is too great for many brokers to bear, and the bitcoin markets move so fast that the broker's exposure to cover its client's short position could quickly become significant."

Walter Lukken, president of the Futures Industry Association, a trade group representing exchanges and financial services firms, argued earlier this month in an open letter to regulators at the Commodities Futures Trade Commission that the cryptocurrency market remains opaque and is prone to manipulation. In response, the CBOE defended its bitcoin contract, the first of its kind, saying it was developed in close consultation with regulators.

Greyscale Bitcoin Investment Trust, which holds the cryptocurrency, also has a relatively small float of about 37 million, making it difficult for short sellers to borrow the security in the hopes of reselling it later at a lower price and pocketing the difference (the method short sellers use to place their bets that a security's price will fall).

"It's probably hard to borrow and expensive to borrow," said Mark Spiegel, a New York-based short seller. "That may be why more guys aren't doing it, and I wouldn't be doing it." Spiegel asks the question that haunts all short sellers: "What if bitcoin keeps soaring? If you had put this trade on when bitcoin was $3,000, you would have gotten killed."

One of Wall Street's leading short sellers, Andrew Left of Citron Research, announced that he had taken a cautious short position in Greyscale Bitcoin Investment Trust. He issued a warning to investors in September about the trust, arguing that it was overvalued compared with its underlying asset and was poised to fall. The exact opposite has happened to both the trust and bitcoin. Citron didn't respond to an email requesting comment for this story.

Shares of the trust vaulted more than 1,700 percent over the past year. Bitcoin prices recently topped $19,000 before settling down to their current level around $17,246. They started 2017 at $960, and in 2010 bitcoins changed hands for 8 cents apiece. 

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    Jonathan Berr is an award-winning journalist and podcaster based in New Jersey whose main focus is on business and economic issues.