Author: Frugho
Compiled by: Block unicorn
It is increasingly evident that many tokens are unlikely to ever return to their historical highs. If you want to understand in more depth why I believe this, I suggest you read my previous article. It explores my vision of the rapidly evolving market and the dilution phenomenon we are witnessing, leading to what I call a "low available liquidity, high total project count" trajectory.
This is particularly evident in ecosystems like , which often feature new tokens that are heavily promoted but have weak fundamentals. The crypto saying, less meme-ified, "you can't hold a token for more than a few hours" is becoming increasingly true. The dopamine rush of seeing tokens skyrocket is directly in line with the direction of the market. The possibility of 1000x returns, like the jackpot of a slot machine, is what draws people to participate in these parabolic rises. This endless liquidity recycling is necessary to maintain the launch of new tokens and witness new 1000x gains. This is an enticing temptation to be able to retire with a single trade.
However, this cycle has also left many tokens that seem destined to decline indefinitely, just like many tokens in past cycles. These tokens are particularly interesting because even as the overall market trend is upward, many tokens are destined to depreciate. This is due to the fragility of their concepts, their control by insiders who know how to profit and sell at the right time, and their reliance on narratives lacking long-term substance. These factors drive them to unsustainable valuations, making their eventual collapse almost inevitable.
Window of short opportunities
Indeed, it may feel a bit late to say this now. There have already been many opportunities to short these types of tokens. However, opportunities like this will undoubtedly arise again. New projects, similar to the explosively but unsustainably growing projects of past cycles, will emerge and reach absurd valuations. Think of examples like GOAT, CHILLGUY, MOODENG, PNUT, or BRETT, and a long list of other tokens. These tokens can quickly accumulate hundreds of millions or even billions of dollars in market capitalization. While these valuations may appear reasonable in the short term due to attention and hype, it is almost certain that these tokens will not be able to maintain such levels within a few months. Either a major market correction, possibly during another bear market, or the waning of the initial hype that drove them will cause them to fall back.
You might think that the biggest challenge in shorting these tokens is timing the top. If the timing is not precise, the strategy can easily backfire, especially when leverage is involved. For example, imagine shorting a token with a $1 billion market cap. If it rises to $1.5 billion or $2 billion, a 50% or 100% increase, your position could be severely damaged. The key issue here is leverage. It's not as simple as opening a short and waiting; even if your timing is not perfect, you must avoid playing a dangerous game, as you will be liquidated if the price moves against you. For this reason, carefully considering these risks and the specific tokens you are targeting will make it clearer that these inflated valuations are unsustainable in the long run.
I often follow the actions and statements of successful people in this space, which is why I want to highlight GCR's famous short of $LUNA. On March 17, @GiganticRebirth hinted at his intention to short Luna. Let's assume he started shorting a few weeks earlier. Despite Luna continuing to rise, he remained steadfast in his belief that the bullish narrative would ultimately end. At the peak, Luna was far above the "initial" price of his short, but GCR persisted with his position. He added more margin, increased his short position, and held firm. Within a few months, Luna completely collapsed. This case demonstrates how a strong argument combined with disciplined execution can overcome the inherent challenge of timing the top.
GCR's trade on LUNA
While finding another token with the market-shaking impact of Luna may be rare, the same principles apply to meme coins and tokens driven by fast-moving narratives. Platforms like Hyperliquid, which have rapidly listed many highly speculative tokens, provide excellent opportunities for on-chain strategies of this nature. The logic is simple: not every token in your portfolio will immediately collapse, but the overall probability heavily favors a significant decline across a series of short positions.
Shorting meme coins or other narrative-driven tokens is not just a hedge against the broader market. It is also a highly effective way to capitalize on their inevitable decline. Narratives may come and go in crypto, but the structural weaknesses of many tokens mean their long-term prospects are undoubtedly bleak.
Complexity of execution, but +EV
Although this strategy may look simple on paper, the reality is much more complex. Managing these positions requires deep risk management knowledge, the ability to withstand volatility, and strong psychological fortitude and discipline. Adding margin when the trade is going against you can be mentally exhausting and requires unwavering confidence in your thesis. This complexity may explain why so few traders actively pursue this approach or discuss it openly.
Additionally, aside from technical expertise, this is a strategy that few can afford. Participating in low-leverage or non-leveraged positions requires a substantial amount of capital to generate meaningful profits. At the same time, maintaining sufficient liquidity to protect your positions and avoid liquidation is crucial. Opportunity cost is a fundamental concept in crypto, as our liquidity is always limited. Applying this strategy will typically lock up a significant portion of your capital in the trade. Following this approach, the maximum return you can realistically expect is a doubling of your position or slightly more, depending on the leverage applied.
Another important factor to consider is the number of short positions opened on platforms like Hyperliquid and the high funding costs. Managing funding rates is critical, as while they typically do not have a severe long-term impact, the listing of new tokens often sees aggressive shorting activity, driving funding rates to high levels.
For this reason, shorting immediately after a token's listing may not always be profitable. High funding costs can erode potential returns, and there is also a risk of the token experiencing price manipulation, especially if it is listed on perpetual contracts on a Tier 1 CEX. This could happen to capture funding fees, leverage hype, or simply exploit the initial volatility. Furthermore, these rallies, whether due to speculation or coordinated efforts, can temporarily push the token's price higher, making shorting more dangerous during this initial phase. Therefore, proper timing and monitoring of funding rates are crucial to maximize profitability in these situations.
Apart from the initial listing scenarios, these types of strategies are typically reserved for whales, institutions, or users aiming to hedge or be satisfied with the returns on the capital they are willing to invest. Additionally, this is a slow-moving trade. You must ensure you have sufficient liquidity to handle the potential upside of the assets you are shorting until they align with your bearish view.
Despite these challenges, the expected value of this strategy remains overwhelmingly positive. Shorting a portfolio of overvalued tokens with weak narratives provides a diversified investment management approach. The numbers speak for themselves: even if one or two tokens in the portfolio do not collapse, the others may, resulting in a net positive return. Whether as a hedge or a standalone strategy, this approach has immense potential for those with the patience and resources to execute it effectively.
The collapse of some Meme coins
Embrace the short, or they will
Typically, people in the crypto space are reluctant to take a bearish stance. They prefer to celebrate when others are celebrating. This is a classic example of FOMO or herd mentality, especially when their timelines are filled with bulls and maximalists. In my view, not incorporating shorts more frequently into the strategy is a missed opportunity.
Shorting overvalued tokens, especially those driven by fast-paced narrative hype or Meme hype, is one of the most prominent strategies in today's crypto market. Platforms like Hyperliquid provide the tools needed to effectively execute this strategy. While the psychological and operational challenges are significant, the potential rewards make it worthwhile. For those willing to embrace this complexity, allocating a portion of their portfolio to shorts on unsustainable narratives is not just a hedge. It is a smart investment strategy that can redefine how you navigate this rapidly evolving market.
