There’s never a dull moment in the world of cryptocurrency.

The latest bizarre development in the turbulent space is the news that Chinese Bitcoin miners have been shorting the price of the very asset they’re seeking to produce, essentially betting money that the price will fall further.

But why?

Hedging Bets

The actions of the miners actually have some solid logic behind them. By shorting the price of Bitcoin, they’re hedging against the potential that they’ll lose even more money in their current venture.

Mining is very expensive, and the payoff for running up the huge energy bills associated with solving the cryptographic puzzles required to verify transactions and mine more Bitcoin is, of course, Bitcoin. However, when the price drops dramatically as it has in the current bear market, the cost of mining can be breakeven, or even worse.

Many miners are now operating at a loss – the cost of the equipment, the incredibly high electricity requirements, perhaps even the cost of renting a warehouse for all the mining equipment – it adds up and some miners are going out of business, doomed by falling Bitcoin prices.

A short-term solution to this is betting that the price of Bitcoin will actually fall even further – with margin trading, it’s possible win back more than the original bet, making this a feasible solution for now, even if it’s more like slapping a band-aid on the hole in a sinking ship.

One miner named Jin Xin described short-selling as an act of self-defence to prevent miners from being “ultimately eliminated”,  saying:

“If I mine 30 coins in the next month, while the price may continue to fall by another 10 percent according to the current trend, I shall place a short order on the exchange to sell them at the current price, but deliver one month later.”

Market Effects

BTCUSDSHORTS Chart

The thing is, Bitcoin traders are an emotional bunch. Like with any trading market, trends in sentiment are important and influential, and when many people start shorting the market, many more people start getting a bad feeling about the future price.

The herd mentality leads them to think that because everyone is shorting, the price must be about to fall – so they start shorting too, or they sell, both of which can lead to the price dropping even further.

Ironically, by shorting the market to hedge their losses, the miners are most likely contributing to the decline in the value of Bitcoin. Of course, many of them are surely aware of this, but desperate times call for desperate measures, and immediate survival is probably the only thing on the agenda for the majority of miners forced to short their own commodity.

With reports of miners attempting to relocate and even selling their SHA256 mining rigs by the kilo to stay afloat, it’s no wonder that so many of them are forced to short-sell the assets that in better market conditions they would be holding in the hopes that it would accumulate value, paying for their entire operation and then some.