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Home»ALTCOIN NEWS»Shorting Solana meme coins can result in losses. The risks are as follows:
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Shorting Solana meme coins can result in losses. The risks are as follows:

By Crypto FlexsAugust 1, 20244 Mins Read
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Shorting Solana meme coins can result in losses. The risks are as follows:
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Dumpy.fun becomes the first platform to trade Solana meme coins short term.

Shorting any asset carries significant risks.

The risks extend to lenders on the platform as well.

Meme coins are one of the most volatile assets in cryptocurrencies, driven largely by hype. Their prices fluctuate wildly, rising and falling much more than other tokens. However, until now, traders have only been able to bet on each coin going up.

Most recently, Save Finance, formerly known as Solend, has introduced a platform where traders can bet on these tokens. Dumpy.fun, styled after the popular pump.fun, allows traders to short meme coins and profit when the price drops. However, this strategy carries significant risks, much higher than traditional meme coin trading.

Dumpy.fun allows traders to profit from declining meme coins.

Short selling is coming to Solana meme coins, offering new potential for profit with significant risk. On Tuesday, July 30, Save Finance (formerly Solend) launched dumpy.fun beta, a meme coin short selling platform that allows users to profit from the decline in token value.

Dumpy.fun interface with sample transactions
Source: Dumpy.fun

The platform is simple to use. Users must first choose the token they want to short and the amount they want to short. They must then post collateral equivalent to 200% of the short position. The platform then publishes the trading conditions, allowing users to connect their wallets and choose to trade.

The platform uses the deposited collateral to borrow meme coins and sells them immediately at the current market price. If the token price falls, the trader can buy the token and return the amount to the lender, making a profit. However, if the token price rises, the trader may face rapid liquidation.

Risks of Shorting Meme Coins on Dumpy.fun

Liquidation risk This is the most immediate risk faced by short sellers. This occurs when the token value rises enough that the collateral is insufficient to cover the trade. If the trader fails to provide additional collateral, the position will be liquidated, resulting in the complete loss of the initial collateral.

Dumpy.fun Risk DisclaimerDumpy.fun Risk Disclaimer
Source: Dumpy.fun

For example, if a trader buys WIF at 1.93 USDC per coin, it only takes for WIF to rise to 2.145 USDC before he is faced with a margin call. If he cannot provide more collateral, his position will be liquidated, resulting in a loss of collateral.

This is a significant risk, because meme coins are notoriously volatile. Even if the token shows a medium-term downtrend, a brief uptrend can wipe out short sellers. Furthermore, this high volatility Risk pressureThis would mean a chain of liquidations that could result in significant losses for short sellers.

Risks for lenders on platforms like Dumpy.fun

Short sellers are not the only parties exposed to risk. The most important of these are: Bad debt risk. Traders must be aware that they run the risk of liquidation leaving them with more debt than they can cover with collateral.

These losses are spread across all lenders on the platform.

This causes losses for all lenders, and if such liquidations are repeated, the losses can be significant.

Lenders should consider the following: Risk of exploitationThis is when all tokens are loaned and temporarily unwithdrawal is not possible.

In addition to these risks, both lenders and short sellers should be aware of the following: Oracle RiskThis is caused by an incorrect price oracle.

On the other side

Short selling is risky. It is important for short sellers to only put up collateral that is equal to the amount they can afford to lose.

Lenders must be aware that they too are exposed to the risk of losing all of their capital.

Why this matters

Understanding the risks of shorting meme coins on platforms like Dumpy.fun is essential for both traders and lenders in the volatile cryptocurrency market. Knowing these risks can help traders manage their collateral more effectively and avoid significant losses.

Learn more about Meme Coin volatility:
Meme coins have increased the impact of market corrections this cycle.

Learn more about Solana ETF Outlook:
SEC OKs Solana, But SOL ETFs Are No Longer a Thing – Here’s Why

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