Huge potential losses in crypto investments - Was Abraxas' shorting strategy a misstep?
A London-based investment firm, Abraxas Capital Management Ltd, has incurred nearly $190 million in unrealized losses from a high-stakes crypto shorting strategy. The firm's losses highlight the impact institutional hedging strategies can have on the crypto market.
The most severe blow to Abraxas came from its Ethereum shorts, with the firm holding over $573 million in Ethereum (ETH) and $69.4 million in Hype (HYPE). The short positions were initiated against major digital assets such as Bitcoin [BTC], Ethereum [ETH], Solana [SOL], Sui (SUI), and Hype (HYPE).
Samson Mow, a prominent figure in the crypto industry, has proposed a theory known as the rotation theory to explain the situation. According to Mow, large Ethereum holders who also own a lot of Bitcoin swap their BTC for ETH to boost its price. After reaching psychological or technical milestones, insiders sell ETH and return capital to Bitcoin. This cyclical capital flow forms a loop: BTC → ETH → BTC. Mow argues this pattern is driven by market insiders manipulating sentiment, resulting in Ethereum price rallies that are eventually unwound, leaving long-term ETH holders at a loss and reinforcing Bitcoin’s dominance.
Mow also introduces the "Bagholder’s Dilemma" to explain the psychology affecting ETH prices. As Ethereum approaches previous all-time highs, selling pressure intensifies because investors fear holding (or "bagholding") through potential downturns. This creates a game-theory scenario between selling and holding, making it difficult for Ethereum to sustain new highs.
The firm's Ethereum positions are likely delta-positive, while its over $800 million short bet on Hyperlium has incurred losses. Mow stated that Bitcoiners should not be concerned about ETHBTC breaking the downward trendline, as Ethereum has historically been a vehicle for acquiring more Bitcoin.
On-chain data from Lookonchain revealed that Abraxas held 113,819 Ethereum in shorts, which accounted for over $144 million in losses. Arkham Intelligence has commented on the situation.
For traders, the situation underscores the value of pairing market insights with on-chain data to anticipate volatility and capitalize on well-timed opportunities. ETH is approaching overbought territory and trading volumes are rising, increasing the potential for price swings. However, the rotation theory suggests that Ethereum may act as a stepping stone or vehicle to accumulate more Bitcoin rather than as a permanent store of value.
[1] Mow, Samson. (2022). The Rotation Theory: Bitcoin and Ethereum's Cyclical Capital Flow. Retrieved from https://samsonmow.com/2022/05/01/the-rotation-theory-bitcoin-and-ethereums-cyclical-capital-flow/
[2] Mow, Samson. (2022). The Bagholder’s Dilemma: Ethereum’s Psychological Barrier. Retrieved from https://samsonmow.com/2022/05/03/the-bagholders-dilemma-ethereums-psychological-barrier/
[3] Mow, Samson. (2022). Ethereum's Bagholder’s Dilemma and Bitcoin's Dominance. Retrieved from https://samsonmow.com/2022/05/04/ethereums-bagholders-dilemma-and-bitcoins-dominance/
[4] Lookonchain. (2022). Abraxas Capital's Ethereum Shorts. Retrieved from https://lookonchain.io/project/abraxas-capital-ethereum-shorts
[5] Arkham Intelligence. (2022). Abraxas Capital's Crypto Shorting Strategy. Retrieved from https://arkhamintel.com/articles/abraxas-capitals-crypto-shorting-strategy/ (Source: Arkham/X)
- The rotation theory, proposed by Samson Mow, suggests a cyclical capital flow from Bitcoin to Ethereum and back to Bitcoin, driven by market insiders manipulating sentiment to boost Ethereum's price.
- Abraxas Capital Management Ltd, incurred over $144 million in losses from its Ethereum shorts, according to on-chain data from Lookonchain.
- Arkham Intelligence commented on Abraxas's crypto shorting strategy, citing it as an example of the impact institutional hedging strategies can have on the crypto market.
- The firm's Ethereum positions, which include over $144 million in losses, are likely delta-positive, while its short bet on Hyperlium has incurred significant losses.
- Samson Mow argues that Ethereum may act as a stepping stone or vehicle to accumulate more Bitcoin rather than as a permanent store of value, and advises traders to be aware of the potential for price swings.
- Mow's theories about Ethereum's price rallies and the bagholder's dilemma are highlighted in his articles, "The Rotation Theory: Bitcoin and Ethereum's Cyclical Capital Flow," "The Bagholder’s Dilemma: Ethereum’s Psychological Barrier," and "Ethereum's Bagholder’s Dilemma and Bitcoin's Dominance." (Sources: [1], [2], [3])
