The collapse of FTX in November 2022 sent shockwaves across the crypto world, wiping out billions in value and triggering a chain reaction of bankruptcies and liquidity crises. In hindsight, the warning signs were glaring: poor accounting practices, an absent board of directors, and a CEO more focused on playing video games than managing a $32 billion empire. Yet, despite these red flags, no major investor or hedge fund executed a high-profile short against FTX—a puzzling absence that echoes a broader structural flaw in the cryptocurrency market.
This raises a critical question: Why didn’t anyone bet against FTX before its downfall? The answer lies not just in oversight or misjudgment, but in the lack of accessible shorting infrastructure, limited market transparency, and high operational risks that deter even seasoned investors.
The Missing Short Sellers: A Structural Gap
In traditional financial markets, short sellers play a crucial watchdog role. By identifying overvalued or fraudulent companies—like those exposed during the 2008 housing crisis in The Big Short—they help correct market inefficiencies and sometimes prevent larger systemic failures. However, in the decentralized and largely unregulated world of cryptocurrency, this stabilizing force is severely weakened.
Take Galois Capital, for example. This hedge fund successfully shorted Terra (now known as LUNA) before its catastrophic implosion erased nearly $1 trillion from the crypto market. While most investors were riding the hype wave, Galois saw through the flawed economic model and profited handsomely. Their success mirrored classic contrarian investing—but such wins remain rare exceptions in crypto.
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So why didn’t similar strategies apply to FTX?
Barriers to Shorting Crypto Assets
1. Absence of Traditional Brokerage Infrastructure
In conventional stock markets, shorting is straightforward: you borrow shares from a prime broker like JPMorgan or Goldman Sachs, sell them at current prices, then buy them back later at a lower price (if your bet is correct). The system relies on trusted intermediaries who manage collateral, lending logistics, and settlement.
In crypto? That infrastructure barely exists.
Chris DeRose, founder of Bleecker Street Research and a veteran short seller known for exposing corporate frauds, admits he never shorted FTX—or any major crypto project—despite closely monitoring the space. His reason? No reliable prime brokers.
“There’s no Morgan Stanley of crypto,” DeRose explains. “If I short a stock and my broker goes under six months later, I’m in serious trouble—especially when managing other people’s money.”
This risk became reality when Genesis Global Capital, one of the few crypto prime brokers offering lending services, froze withdrawals due to financial distress—echoing the very instability short sellers aim to expose.
2. Retail Access Is Extremely Limited
Even individual traders face steep barriers. Unlike equities platforms like Fidelity or Charles Schwab, which allow retail investors to short stocks with relative ease, most crypto platforms don’t offer direct shorting mechanisms.
While some centralized exchanges like Binance provide futures contracts—including perpetual swaps that simulate short positions—these come with significant drawbacks:
- High funding rates: Perpetual futures require traders to pay ongoing fees to maintain short positions, especially in bullish markets.
- Counterparty risk: If the exchange collapses—as FTX did—your profits vanish along with your collateral.
- Liquidity constraints: Thin order books and slippage can distort trade execution.
As Tom Dunleavy, senior analyst at Messari, notes:
“Most bearish bets are made via perpetual futures because there’s no robust options market in crypto. But sustained bearish positions become prohibitively expensive.”
Could Short Sellers Prevent Future Crypto Collapses?
Despite their controversial reputation—often labeled as market manipulators or vultures—short sellers serve an essential function: market discipline.
Dr. Jiemai Wu-Morley, Professor of Business Analytics at Columbia Business School, supports this view:
“Academic consensus shows short selling has net positive effects. Without it, there’s no mechanism to spotlight bad actors.”
She argues that a mature, regulated short-selling ecosystem could have flagged red flags at FTX earlier—just as it did with Enron or Wirecard in traditional finance.
Yet, ironically, even those who do successfully short crypto face new dangers. Galois Capital may have profited from Terra’s collapse—but half of its gains remain trapped inside the bankrupt FTX platform, underscoring the tragic paradox: you can predict a disaster, but still lose everything if the system fails.
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Core Challenges Summarized
- No trusted lending counterparties for borrowing tokens.
- High cost of maintaining short positions via perpetual futures.
- Extreme counterparty risk due to exchange insolvencies.
- Lack of transparency in on-chain data and corporate governance.
- Regulatory uncertainty discourages institutional participation.
Frequently Asked Questions (FAQ)
Q: Can you short FTX today?
A: No. Since FTX filed for bankruptcy and suspended operations, its native token FTT is no longer actively traded on major platforms. Any prior short positions would have been settled or liquidated during the collapse.
Q: What is a perpetual futures contract?
A: It’s a derivative product common in crypto that allows traders to take leveraged long or short positions without expiration. To balance price alignment with the spot market, short holders often pay funding fees—making long-term bearish bets costly.
Q: Are there any safe ways to bet against crypto projects?
A: Currently, options are limited. Some institutional investors use OTC desks or specialized crypto prime brokers, but access is restricted. For retail users, regulated futures on platforms like CME offer indirect exposure—but only for top-tier assets like Bitcoin and Ethereum.
Q: Did any analysts warn about FTX before it collapsed?
A: Yes. Journalists and researchers raised concerns about FTX’s ties to Alameda Research and questionable reserve practices. However, without a mechanism to publicly bet against FTT or express skepticism through trading activity, these warnings lacked market impact.
Q: Will crypto ever develop a healthy short-selling ecosystem?
A: It’s possible—but only with stronger regulation, transparent reporting standards, and resilient custodial infrastructure. Until then, markets will remain vulnerable to unchecked hype and fraud.
Final Thoughts
The absence of effective short selling in crypto isn't just a technical gap—it's a systemic vulnerability. Without mechanisms for informed skepticism to translate into market action, bubbles grow unchecked and collapses become inevitable.
FTX wasn’t invisible; its flaws were evident to many. But without the tools to act on that insight, even the sharpest analysts were powerless.
As the industry rebuilds trust post-FTX, developing safe, transparent, and accessible shorting infrastructure must be a priority—not just for profit potential, but for market integrity itself.
Core Keywords:
- shorting cryptocurrency
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- selling FTT
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- hedge funds in crypto
- preventing crypto fraud
- perpetual futures trading