Article author: Frugho
Article translation: Block unicorn
It is becoming increasingly clear that many tokens will most likely never return to their all-time highs. If you want a deeper dive into why I think this, I recommend reading my previous article. It explores my vision for the increasingly fast-moving market, and the dilution we are seeing, which leads to what I call a “low available liquidity, high total number of projects” trajectory.
This is especially evident in ecosystems like Solana, which often feature new tokens that are hyped but have weak fundamentals. A not-so-meme-y saying in crypto, “You can’t hold a coin for more than a few hours,” is becoming more and more true. The dopamine rush of seeing a token pump is directly aligned with the direction of the market. The possibility of a 1000x return, like a slot machine jackpot, is what draws people to these pumps. This endless recycling of liquidity is necessary to keep new tokens being launched and witnessing new 1000x gains. It’s the tantalizing lure of being able to retire with a single trade.
However, this cycle has also left behind many tokens that seem destined to fall indefinitely, just like many tokens in past cycles. These tokens are particularly interesting because many are destined to lose value even if the overall market trend is upward. This is due to the fragility of their concepts, their control by insiders who know how to take profits and sell at the right moment, and their reliance on narratives that lack long-term substance. These factors push them to unsustainable valuations, making their eventual collapse almost inevitable.
Window of short selling opportunity
Indeed, it may feel a little late to say this now. There have been many opportunities to short these types of tokens. However, opportunities like this will undoubtedly arise again. New projects, similar to the ones that have seen explosive but unsustainable growth in past cycles, will emerge and reach ridiculous valuations. Think of examples like GOAT, CHILLGUY, MOODENG, PNUT, or BRETT, among a long list of others. These tokens can quickly accumulate market valuations of hundreds of millions or even billions of dollars. While these valuations may seem justified in the short term due to attention and hype, it is almost certain that these tokens will not be able to sustain such levels within a few months. Either a major market correction, perhaps during another bear market, or the heat of their initial hype dies down, will bring them back down.
You might think that the biggest challenge in shorting these tokens is timing the top. Without precise timing, a strategy can easily backfire, especially when leverage is involved. For example, imagine shorting a token with a market cap of $1 billion. If it rises to $1.5 billion or $2 billion, an increase of 50% or 100%, your position could be severely damaged. The main 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 because you will be liquidated if the price moves against you. For this reason, carefully considering these risks and the specific token you are targeting will make it even clearer that such inflated valuations are unsustainable in the long run.
I often follow the words and deeds of successful people in this space, which is why I want to highlight GCR’s famous short of $LUNA. On March 17th, @GiganticRebirth hinted at his intention to short Luna. Let’s assume he had already started shorting a few weeks ago. Although Luna continued to climb, he firmly believed that the up party would eventually end. At the top, Luna was far above the “initial” price of the short, but GCR stuck to his point. He added more margin, increased his short position, and stayed the course. Within a few months, Luna completely collapsed. This case shows how a strong thesis coupled with disciplined execution can overcome the inherent challenges of timing tops.
GCR to LUNA Trading
While it may be rare to find another market-shaking token like Luna, the same principles apply to meme coins and tokens driven by fast-moving narratives. Platforms like Hyperliquid, which quickly list many highly speculative tokens, provide a great opportunity for such strategies on-chain. The logic is simple: every token in your portfolio will not collapse immediately, but the overall probability is heavily tilted towards a significant decline for a series of short positions.
Shorting meme coins or other narrative-driven tokens isn’t just a hedge against the broader market. It’s also a highly effective strategy for capitalizing on their inevitable declines. Narratives may come and go in crypto, but the structural weaknesses of many tokens mean their long-term prospects are decidedly bleak.
Implementation complexity, but +EV
Although this strategy looks simple on paper, the reality is much more complicated. Managing these positions requires deep knowledge of risk management, the ability to withstand volatility, and strong mental toughness and discipline. Adding margin when a trade moves against you can be psychologically exhausting and requires a strong belief in your view. This complexity may explain why so few traders actively pursue this approach or discuss it publicly.
Furthermore, aside from technical expertise, this is a strategy that few people can afford. Participating in low-leverage or no-leverage positions requires a significant amount of capital to generate meaningful profits. At the same time, it is crucial to maintain sufficient liquidity to protect your positions and avoid liquidation. Opportunity cost is one of the fundamental concepts in the crypto space, as our liquidity is always limited. Applying this strategy will usually lock up a large portion of your capital in the 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 number of short positions opened on platforms like Hyperliquid and the high cost of funding. Managing funding rates is crucial because while they usually do not have a severe impact in the long term, the listing of new tokens often sees aggressive shorting activity, driving funding rates to high levels.
For this reason, shorting a token immediately after it is listed may not always be profitable. High funding costs can erode potential returns, and there is also the risk that the token experiences price manipulation, especially if the token is listed on a perpetual contract on a Tier 1 CEX. This can happen to capture funding fees, take advantage of hype, or simply take advantage of initial volatility. Additionally, these pumps, whether due to speculation or coordinated efforts, can temporarily drive up the price of a token, making shorting even more risky during this initial phase. Therefore, proper timing and monitoring of funding rates are critical to maximizing profitability in these situations.
Aside from the early days of listing, these types of strategies are usually reserved for whales, institutions, or users who are looking to hedge or feel comfortable with the return on the capital they are willing to put in. Additionally, this is a slow-moving trade. You must ensure that there is enough liquidity to handle the potential upside of the asset you are shorting until it aligns with 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 diversified approach to portfolio management. The numbers speak for themselves: Even if one or two tokens in the portfolio don’t crash, others will likely crash, resulting in a net positive return. Whether as a hedge or standalone strategy, this approach has tremendous potential for those with the patience and resources to execute it effectively.
The collapse of some meme coins
Embrace short selling, or they will
Typically, people in the crypto space are reluctant to take a bearish stance. They prefer to celebrate when others celebrate. This is a classic example of FOMO or the herd effect, especially when their timelines are filled with bulls and maximalists. Not incorporating shorts into strategies more often is a missed opportunity in my opinion.
Shorting overvalued tokens, especially those driven by rapid narrative hype or meme hype, is one of the most compelling strategies in crypto markets today. 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 accept these complexities, allocating a portion of your portfolio to shorts of unsustainable narratives is more than just a hedge. It is a smart investment strategy that can redefine how you navigate this rapidly evolving market.
