Is crypto narrative overrated? Skip directly

Article Author: Frugho

Article Compilation: Block unicorn

It is becoming increasingly obvious that many tokens will most likely never return to their all-time highs. If you want to have a deeper understanding of why I think so, I suggest you read my previous post. It explores my vision of the growing market and the dilution we are seeing, which leads to what I call “low available liquidity, high total project count.”

This is particularly evident in ecosystems like Solana, which often feature new tokens that are hyped but have weak fundamentals. A less memetic statement in the crypto space, “You can’t hold a token for more than a few hours” is becoming more and more real. The dopamine impulse to see the token surge is directly consistent with the direction of the market. The possibility of a 1000-fold return, like the slot machine jackpot, is what attracts people to participate in these surges. This endless liquidity recovery is necessary to keep the new token rollout and witness new 1000x returns. This is the tempting temptation to be able to retire with one transaction.

However, this cycle also leaves many tokens that seem destined to fall infinitely, just like many of the tokens in the past cycle. These tokens are particularly interesting because many are destined to depreciate even if the overall market trend is up. This is due to the fragility of their concepts, they are controlled by insiders who know how to profit and sell out at the right moment, and their reliance on narratives that lack long-term substance. These factors drive them to unsustainable valuations, making their ultimate collapse almost inevitable.

Window of short selling opportunities

Indeed, it may feel a little too late to say this now. There are already many opportunities to short these types of tokens. However, opportunities like this will undoubtedly reappear. New projects, similar to those that have explosive but unsustainable growth in the past cycle, will emerge and reach ridiculous valuations. Think of examples like GOAT, CHILLGUY, MOODENG, PNUT or BRETT, and a long list of other tokens. These tokens can quickly accumulate market valuations of hundreds of millions or even billions of dollars. While these valuations may seem 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 in a few months. Either a major adjustment in the market, maybe during another bear market, or the heat of their initial hype fades, will cause them to fall back.

You might think that the biggest challenge in shorting these tokens is to seize the top opportunity. Without the exact timing, strategies can easily backfire, especially when leverage is involved. For example, imagine shorting a token with a market capitalization of $1 billion. If it goes up to $1.5 billion or $2 billion, an increase of 50% or 100%, your position could be severely damaged. The main problem here is leverage. It's not as simple as opening a short seller and waiting; even if your timing is not perfect, you have to avoid playing dangerous games because if the price is against you, you will be liquidated. For this reason, carefully considering these risks and the specific tokens you are targeting will make it more clear that in the long run, such inflated valuations are unsustainable.

I often pay attention to the words and deeds of successful people in this field, which is why I want to emphasize GCR's famous short selling on $LUNA. On March 17, @GiganticRebirth hints at his intention to short Luna. Let's assume he's already started shorting a few weeks ago. Although Luna continues to climb, he firmly believes that the upward party will eventually end. At its peak, Luna far exceeded the “initial” price of shorting, but GCR stuck to his point of view. He added more margin, increased his short position and stuck to the end. Within a few months, Luna completely collapsed. This case demonstrates how strong arguments coupled with disciplined enforcement overcome the inherent challenges of grasping the top timing.

 GCR\'s transaction to LUNA

While it may be rare to find another token that has a market stunning power like Luna, the same principle applies to Meme coins and tokens driven by fast moving narratives. Platforms like Hyperliquid have quickly launched many highly speculative tokens, providing excellent opportunities for such strategies on-chain. The logic is simple: every token in your portfolio won't collapse immediately, but the overall probability is seriously inclined to a significant decline in a series of short positions.

Shorting Meme coins or other narratively driven tokens is not just a hedge against the broader market. This is also a very effective strategy to take advantage of their inevitable declines. Narratives may come and go in the crypto space, but the structural weaknesses of many tokens mean that their long-term prospects are undoubtedly bleak.

Complexity of execution, but +EV

Although this strategy may seem simple on paper, the reality is much more complex. Managing these positions requires deep knowledge of risk management, ability to withstand volatility, and strong psychological qualities and discipline. Increased margin when trading is bad for you can be psychologically exhausting and requires a firm confidence in your point of view. This complexity may explain why few traders actively pursue this approach or discuss it publicly.

In addition, besides technical expertise, this is a strategy that few people can afford. Participating in a low-leverage or unleveraged position requires a lot of money to generate meaningful profits. At the same time, it is crucial to maintain adequate liquidity to protect your position and avoid liquidation. Opportunity cost is one of the basic concepts in the crypto space because our liquidity is always limited. Applying this strategy will usually lock most of your money in transactions. Following this approach, the maximum return you can actually expect is double or slightly more of the position, depending on the leverage applied.

Another important factor to consider is the number of short positions opened on platforms such as Hyperliquid and the high capital costs. Managing fund rates is crucial because while they usually don’t have a serious impact in the long run, listings of new tokens often see aggressive short selling activities that drive fund rates to high levels.

For this reason, shorting immediately after the token goes public may not always be profitable. High capital costs can erode potential returns, and there is also the risk that tokens will experience price manipulation, especially if they are listed on perpetual contracts for Tier 1 CEX. This can occur to acquire funding expenses, take advantage of hype, or simply take advantage of initial fluctuations. Furthermore, these increases, both due to speculation and coordinated efforts, may temporarily push up the token price, making short selling more dangerous at this initial stage. Therefore, proper timing and capital rates monitoring is crucial to maximize profitability in these situations.

Except in the early stages of listing, these types of strategies are usually reserved for giant whales, institutions, or users who aim to hedge or are satisfied with the return on capital they are willing to invest. Also, this is a slow moving transaction. You have to make sure there is enough liquidity to handle the potential upside of your short assets until it matches your bearish view.

Despite these challenges, the expected value of this strategy remains overwhelmingly positive. Shorting a range of overvalued tokens associated with weak narratives provides a diverse approach to investment management. The numbers speak for themselves: Even if one or two tokens in the portfolio do not crash, other tokens may crash, resulting in net positive returns. Whether as a hedge or an independent strategy, this approach has great potential for those who have the patience and resources to execute it effectively.

 Some Meme coins crash

Embrace shorting or they will

Often, people in the crypto are reluctant to take a bearish stance. They prefer to celebrate when others celebrate. This is a typical example of FOMO or herd effect, especially when their timeline is full of bulls and maximists. In my opinion, not including shorting into strategies more frequently is a missed opportunity behavior.

Short selling overvalued tokens, especially those driven by rapid narrative hype or Meme hype, is one of the most compelling strategies in today’s crypto market. Platforms like Hyperliquid provide the tools needed to effectively execute this strategy. Although both psychological and operational challenges are great, the potential rewards make it worth it. For those willing to embrace these complexities, allocating a portion of the portfolio to the shorts in the unsustainable narrative is more than just hedging. This is a smart investment strategy that can redefine how you navigate this rapidly growing market.