The Value in Shorting Overvalued Crypto Narratives
Why Many Tokens Will Never Return to Their ATHs and How to Capitalize with Shorting Strategies
One thing that has become increasingly clear is the high probability that many tokens will never return to their all-time highs. If you want to dive deeper into why I believe this, I recommend reading my last article. It explores my vision of an increasingly fast-moving market and the dilution we are seeing, which leads to a trajectory I have dubbed "low available liquidity, high total project count".
The Crypto Market as a High-FDV, Low-Float Ecosystem
The concept of low-float, high-FDV (Fully Diluted Valuation) was popularized by Cobie in his Substack, which provided an in-depth and well-articulated explanation. However, this strategy was already being utilized by notable figures such as GiganticRebirth
This is particularly evident in ecosystems like Solana, which often feature new tokens that are heavily hyped but fundamentally weak. The not so memetic saying in crypto trenches “you can’t hold a token for more than a few hours” is becoming increasingly true. The dopamine rush of seeing a token pump aligns directly with the direction of the market. The possibility of a 1000x return, much like a slot machine jackpot, is what hooks people on these pumps. This endless recycling of liquidity is necessary to keep launching new tokens and witnessing new 1000x gains. It’s the addictive allure of being able to retire with a single trade.
However, this cycle also leaves behind a multitude of tokens that seem destined to decline indefinitely, much like many tokens from past cycles. These tokens are particularly interesting because, even if the broader market trends upward, many are bound to lose value. This happens due to their conceptual fragility, their being controlled by insiders who know how to profit and dump their bags at the right moment, and their reliance on narratives that lack long-term substance. These factors drive them to unsustainable valuations, making their eventual crash almost inevitable.
The Window for Shorting Opportunities
It’s true that saying this now might feel a bit late. There have already been plenty of opportunities to short these types of tokens. However, opportunities like these will undoubtedly arise again. New projects, similar to those with explosive yet unsustainable growth from past cycles, will emerge and reach absurd valuations. Think of examples like GOAT, CHILLGUY, MOODENG, PNUT, or BRETT, along with a ridiculously long list of others. These coins can quickly amass market caps of hundreds of millions or even billions. While these valuations may seem justified in the short term due to attention and hype, it’s almost certain that these tokens will not sustain such levels within months. Either a major market correction, perhaps during another bear market, or the fading of their initial hype will bring them back down.
You might think that the biggest challenge in shorting these tokens lies in timing the top. Without precise timing, the strategy can easily backfire, especially when leverage is involved. For instance, imagine shorting a token with a $1 billion market cap. If it rallies to $1.5 billion or $2 billion, a 50% or 100% increase, your position could be severely compromised. The main issue here is leverage. This isn’t as simple as opening a short and waiting; even if your timing isn’t perfect, you must avoid playing a dangerous game and being liquidated if the price moves against you. For this reason, careful consideration of these risks and the specific token you are targeting makes it much clearer that, in the long run, such inflated valuations are unsustainable.
I often pay attention to what successful people in the space say and do, which is why I want to highlight GCR’s famous short on $LUNA. On March 17, @GiganticRebirth hinted at his intention to bet against Luna. Let’s assume he had already started shorting it weeks prior. Although Luna continued climbing higher, he had conviction that the upside party would eventually end. At its peak, Luna went well beyond the supposed “initial” price of the short, but GCR stuck to his thesis. He added more margin, increased his short positions, and held firm. Within months, Luna collapsed entirely. This case demonstrates how a strong thesis combined with disciplined execution can overcome the inherent challenges of timing the top.
While finding another token with the market-shaking impact of Luna may be rare, the same principle applies to meme coins and tokens fueled by fast-moving narratives. Platforms like Hyperliquid, which list many of these highly speculative tokens quickly, present an excellent opportunity for such strategies on-chain. The logic is simple: not every token in your portfolio will collapse immediately, but the overall probability leans heavily toward significant declines across a basket of shorts.
Shorting meme coins or other narrative-driven tokens isn’t just a hedge against the broader market. It’s also a highly effective strategy to capitalize on their inevitable decline. Narratives may come and go in the crypto space, but the structural weaknesses of many tokens mean their long-term prospects are undeniably bleak.
The Complexity of Execution, But +EV
Although the strategy might seem simple on paper, the reality is much more complex. Managing these positions requires deep knowledge of risk management, the ability to endure volatility, and strong psychological discipline. Adding margin when a trade moves against you can be mentally exhausting and demands unwavering confidence in your thesis. This complexity likely explains why so few traders actively pursue this approach or openly discuss it.
Moreover, beyond the technical expertise, this is a strategy that few can afford to execute. Engaging in low or no leverage positions requires significant capital to generate meaningful profits. At the same time, maintaining enough liquidity to protect your position and avoid liquidation is essential. Opportunity cost is one of the fundamental concepts in crypto, as our liquidity is always finite. Applying this strategy often locks up a significant portion of your capital in a trade. Following this approach, the maximum return you can realistically expect is doubling your position or slightly more, depending on the leverage applied.
Another important factor to consider is the amount of short positions being opened on platforms like Hyperliquid and the high cost of funding. Managing funding rates is critical because, while they typically do not have a severe impact in the long term, the listing of a new token often sees aggressive shorting activity, driving funding rates to elevated levels.
For this reason, shorting immediately after a token listing may not always be profitable. High funding costs can eat into potential returns, and there is also the risk of the token experiencing upward price manipulation, especially if the token is listed on perps on tier-1 CEXs. This could occur to farm funding fees, capitalize on hype, or simply exploit the initial volatility. Additionally, these upsides, whether driven by speculation or coordinated efforts, can temporarily inflate the token's price, making it even riskier to short during this initial phase. Proper timing and monitoring of funding rates are therefore crucial to maximize profitability in these scenarios.
Apart from the situations at the start of listings, which are quite coinflip, these types of strategies are typically reserved for large whales, institutions, or users who aim to hedge or are satisfied with the return on the capital they are willing to commit. Additionally, it is a slow-moving trade. You must ensure liquidity to handle potential upsides in the asset you are shorting until it aligns with your bearish thesis.
Despite these challenges, the expected value of such a strategy remains overwhelmingly positive. Shorting a basket of overvalued tokens tied to weak narratives offers a diversified approach to managing your investments. The numbers speak for themselves: even if one or two tokens in the portfolio fail to collapse, the others are likely to, resulting in a net positive return. Whether employed as a hedge or a standalone strategy, this method holds immense potential for those with the patience and resources to execute it effectively.
Embrace The Shorts, Or They Will
Usually people in crypto are hesitant to adopt a bearish stance. They prefer to celebrate when everyone else is celebrating. This is a classic example of FOMO or the bandwagon effect, especially when most of their timeline is filled with bulls and maximalists. In my opinion, not incorporating shorts more often into one’s strategy is a missed opportunity.
Shorting overvalued tokens, especially those driven by rapid narratives or meme-driven hype, is one of the most compelling strategies in today’s crypto market. Platforms like Hyperliquid provide the tools needed to execute this strategy effectively. Although the psychological and operational challenges are significant, the potential rewards make it worthwhile. For those willing to embrace these complexities, allocating a portion of your portfolio to shorts on unsustainable narratives is not just a hedge. It’s a smart investment strategy that can redefine how you navigate this fast-moving market.
