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Ether: Risk of Dramatic Buy and Sells Positions

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May 25, 2020 | 

736 Views | 

Dan Mitchell | 

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According to Cointelegraph, the number of Ether long positions has reportedly increased significantly since February of this year on Bitfinex, as have shorts. This coincides with, (and could be related to) the forthcoming release of ETH 2.0 - although there are other potential factors which can influence token value and long/short investment positions.

So what are the risks of investing in a dramatic long or short investment position, and what effects do increase longs/shorts have on the investment market for Ether (ETH)?

What Is The Difference Between Long and Short Position

Long positions

A long position denotes the speculative investment in a cryptocurrency.

Although Ether is a utility, it also derives much of its value from speculation due to the size and volatility of its market cap, as well as value volatility. Therefore, to hold cryptocurrency in what is known as a ‘long position’ would mean that the investor should possess a ‘bullish’ perspective (expecting appreciation of value) towards the token in question.

Short Positions

A short position is where an investor uses leverage to “borrow” cryptocurrency on the short-term with the agreement that payment will be made at a later date, at the value held by the token at said later date. 

Converse to long positions, the investor in a short position should hold a ‘bearish’ perspective in the asset.

One form of a short position in futures. ErisX launched the first (physically settled) Ethereum futures product for the US market on May 11, 2020.

Influences of Value (Ethereum)

Ether is the token/cryptocurrency associated with the Ethereum network and can be classified as a utility token as its core value is associated with its purpose within the Ethereum Network ecosystem. It is used to pay for ‘gas’ fees which go towards node operators who are responsible for contributing to the mining of Ethereum. These fees are used to pay for the execution of transactions for not only Ether but all tokens based upon the Ethereum Network.

#1: ETH 2.0

It is expected that Ethereum 2.0 is finally just around the corner and will be released next month, June 2020, after several delays (it had originally been slated for a January 2020 release).

Anticipation for Ethereum 2.0 could be one factor to influence heavy investment into long or short positions, due to the expectation that the changes made to Ethereum will either result in a greatly positive or negative response from the community and press which will influence the actions of investors alike.

Changes: What’s New

Ethereum 2.0 is not a fork per-se, but rather an entirely new blockchain called the ‘Beacon chain’ which is built to accommodate a Proof of Stake (PoS) consensus mechanism, rather than the Proof of Work (PoW) system seen on the existing Ethereum blockchain.

PoS offers a handful of advantages over PoW such as improved energy efficiency (versus the high consumption associated with PoW), in addition to increased scalability. Beacon chain will also support enhanced scalability through the implementation of ‘sharding’ technology.

Eventually, a replacement for the existing Ethereum 1.0 blockchain will be forked from the Beacon chain also.

#2: Bitcoin (and rest of the market)

Bitcoin BTC (Satoshi Nakamoto, ‘Bitcoin: A Peer-to-Peer Electronic Cash System’ - 2008) is by far and away from the largest cryptocurrency by Market Cap and was the first in the movement which led to today's cryptocurrency and blockchain industries & technology.

As such, BTC acts as something of a bellwether for the industry. What affects Bitcoin is reflected by the whole market (evidenced by the recent pre-halving Bitcoin sell-off) and Ethereum is no different.

Even though ETH can weather the market depending on the circumstances, a critical blow to Bitcoin would affect Ethereum the same as most other high ranking tokens in the market.

The Cointelegraph report states that long positions have increased by 150% over the past couple of months “despite the historic Bitcoin (BTC) sell-off on March 12 - 13”. Long positions are strong for Ether, despite the mass sell-off of Bitcoin before it's halving - from which it (and most of the market) has yet to recover.

At the same time, short positions have increased “nearly 200% from February’s record lows”. This means that investor confidence is split almost down the middle: high volatility is expected on both sides, with an expected mass sell-off from either or both of the parties depending on how prices trend over the next few months.

Ether should be considered a high-risk investment, with little common consensus on where the value will go next - and multiple potential variables / influencing factors.

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