Why 90% of Institutional Investors are Shorting Ethereum

September 12, 2018


Why 90% of Institutional Investors are Shorting Ethereum

2017 was a huge year for Ether — the coin surged from a low under $10 in January 2017 to a high of over $1300 in January 2018, nearly reaching a market cap of $100 billion. Even more ambitious, it promised us a brand new Internet where we all own our own data safe from intrusion from either individuals or governments. In the months that followed, thousands of other platforms adopted Ethereum as the underpinning platform for their development.

Eight months later, and that roller coaster ride is falling fast. Ether is down to $172, dropping 61% in the last week alone. Slow transaction times and scalability issues make it less competitive against a new batch of cryptos. And it’s no longer talking about replacing Google, Uber, or Facebook.

A recent survey of institutional investors shows that an astonishing 90% of them are shorting Ether.  Hidden Hand Capital, a San Francisco-based family office started by tech entrepreneur Timothy Young handles $100 million worth of cryptocurrencies and has a “short” position on Ether.

New York-based Tetras Capital published a 41 page report explaining its reasons for shorting Ether. Founding partner Alex Sunnarborg is aggressively betting against Ether and investing substantially in Bitcoin. Sunnarborg acknowledges Ethereum’s concept and overall application but believes the two factors are not enough to make it a good investment.

Young partly agrees with the view, and called out the protocol’s “disconnect with price and technology,” However, Young holds an optimistic view of the protocol in the future, and believes developers will fix the infamous scaling issue. The entrepreneurs further voiced concerns of Ethereum’s inflated market cap, which, according to them, does little justice to the network’s capacity of handling 15 transactions per second. In comparison, payments processor VISA is worth at $314 billion and processes 24,000 transactions per second.

Kyle Samani, a managing partner at Multicoin Capital is “seriously considering” shorting the digital currency. However, Multicoin has opened short positions on Litecoin and Ripple and is cautious about adding to its exposure.

Technical issues are also increasing bottlenecks and any possible solutions are at least twelve to eight months off.  Scalability issues have plagued Ethereum with network congestion after the launch of applications on its platform. The December 2017 launch of CryptoKitties, a tradable digital cat game caused skyrocketing fees and hour-long delays for processing transactions on the network.

Tetras noted in its report that applications costs in the Ethereum network were “1 million” times more expensive than Amazon Web Services, a significant disadvantage for companies considering decentralized server systems.

The Ethereum network has several decentralized applications running on its protocol, attracting more than 5,000 active users daily. The network runs at full capacity, and over-congestion immediately causes transaction fees to surge.

Casper and Plasma are two long awaited technical updates that aim to speed up the network and prevent over congestion. However, Tetras think such essential improvements remain a far-fetched feature. The team cites “optimistic estimates” to determine the protocol’s Layer-2 arrangements capable of supporting, or testing, scaling solutions are “roughly two years” off.

There is also the possibility that Ethereum could be added to regulated futures exchanges causing it to either spike or crash — which seems to have been the case with Bitcoin — as mainstream institutional investors to weigh in. The Chicago Board Options Exchange (CBOE), the same platform that launched Bitcoin futures in December 2017, is waiting for the go ahead from the Commodities Futures Trading Commission (CFTO) to launch Ethereum options by the end of 2018.  

Future contracts for Ether could be a game changer either way. It could attract institutional investors with deep pockets and long enough timelines to allow Ethereum to work out its scaling issues. Phillip Nunn, CEO of Wealth Chain Capital, told Cointelegraph that there is potential for certain investors to short Ether, which could have some serious consequences for companies that have launched ICOs on the Ethereum blockchain.

Possible solutions for the two major issues facing the Ethereum platform, scalability and transaction speed, are called Sharding and Casper.

Sharding, announced by Ethereum’s co-founder Vitalik Buterin in April 2018, is a method of increasing the number of transactions that a blockchain can process. The idea of sharding is that the nodes store just a part of the distributed registry, but each element of sharding (i.e. a node) can rely on the information of others.

Casper FFG was published in October 2017, as a “proof of stake (PoS)-based finality system which overlays an existing proof of work (PoW) blockchain.”

It’s designed to solve “open questions of economic finality through validator deposits and crypto-economic incentives.” Its full implementation is being pushed until late 2019.

Over a thousand apps developed on top of its network over the last three months, and Ethereum-based software company, ConsenSys, continues to promote its primacy over all other platforms. With millions of fans holding on, and resident crypto wizard Vitalik Buterin at the helm, it’s hard to count Ethereum out.