Renowned Short Seller Jim Chanos: Arbitraging by Going Long on Bitcoin and Shorting MicroStrategy
Famous Short Seller Jim Chanos
Jim Chanos is a well-known short seller on Wall Street and the founder of Chanos & Company. He gained fame in the early 2000s for successfully predicting the collapse of Enron. He focuses on identifying anomalies in corporate financial statements, particularly highly speculative phenomena that the market overlooks. In the past, he has shorted companies involved in fraud, but now he is more focused on observing the market’s “irrational exuberance.”
Chanos Goes Long on Bitcoin and Short on MicroStrategy
Jim Chanos remarked, “In a bull market, investors get bonus points for promises; in a bear market, reality is discounted.” He believes that certain areas of the current market are returning to a state of “paying a premium for promises,” indicating a resurgence of speculative sentiment.
His recommended trading strategy is to go long on Bitcoin while simultaneously shorting MicroStrategy. This is an arbitrage strategy that capitalizes on the premium between its stock price and Bitcoin’s net asset value.
He criticized companies like MicroStrategy for using fundraising to purchase Bitcoin and then claiming “we own Bitcoin” to boost their company valuations. He finds this practice absurd and points out that these companies are essentially “selling promises and dreams” to retail investors.
He stated that the premium between MicroStrategy’s market price and net asset value (NAV) is an important indicator of market speculative sentiment. This premium had narrowed during recent market turbulence but has since rebounded, showing that speculative sentiment remains strong.
He employs a “short spread trade” strategy, which involves buying Bitcoin while shorting MicroStrategy’s stock to bet on the narrowing of the premium. This strategy does not predict the movement of Bitcoin but focuses on arbitraging the price difference between the two, a method commonly used by hedge funds.
Market Data Insights
According to data from Strategy Tracker, the NAV Premium soared to 3.4 last November, but has since retreated to the current value of 1.86.
(MicroStrategy MSTR Becomes a New Bitcoin Indicator, mNAV Premium Ratio and Tracking Site Introduction)
Chanos warned that many areas of the market are still rife with irrationality and excessive optimism, urging investors to be wary of the phenomenon of “valuing based on dreams.” He still believes that shorting remains an effective risk hedging tool, especially in such an environment.
Risk Disclaimer
Investing in cryptocurrencies carries a high degree of risk, and their prices can be extremely volatile, potentially resulting in the loss of all principal. Please assess the risks carefully.
