Cryptocurrency investors or professional crypto traders interested in learning how to short Bitcoin (BTC) should be forewarned: Short selling Bitcoin is a high-risk investment strategy. The Bitcoin price is historically volatile, and the price swings can be drastic. Its price increases are so staggering; they surprise some of the cryptocurrency’s most bullish advocates.
When a speculator takes a short security position, depending on how they do it (find a review of each major short-selling investment method and trading strategies for Bitcoin below), they consider the high risk for their portfolio. They can lose their entire investment because there’s technically no limit to how high the security’s price could rise. In the case of Bitcoin, shorting can easily become a strategy for losing money rapidly.
Short selling Bitcoin is an advanced trading strategy and involves some clever technical solutions to be implemented.
Read on for our ultimate guide on the fundamental mechanics of shorting and learn how to short sell Bitcoin using various methods.
How to Short Bitcoin
When shorting Bitcoin, the aim is to sell the cryptocurrency at a high price and repurchase it at a lower price. Short-sellers aim to sell high and buy low. If they are correct and the price drops, the Bitcoin trader profits from the price movement between when they sold the asset and when they repurchased it.
Shorting Bitcoin is an advanced investment strategy that comes with a high level of risk. However, if you master the skill, you can acquire massive returns during times of market value decline.
The most common way to short Bitcoin is by shorting Bitcoin derivatives like futures and options. Contract for differences (CFD), in which you pocket the difference between an asset’s actual price and your expected price, is another way in which you can short Bitcoin pricing. Prediction markets trade the outcome of events for shorting Bitcoin.
Here are some risk factors that you should consider while shorting Bitcoin:
- Bitcoin price is volatile
- Bitcoin, as an asset, is risky
- The regulatory status for Bitcoin is still unclear
Bitcoin Trading
Bitcoin trading is how you can speculate on movements in the cryptocurrency’s price. While this has traditionally involved buying Bitcoin through an exchange, cryptocurrency traders increasingly use Bitcoin derivatives to make the most of Bitcoin’s volatility.
The various Bitcoin trading styles and strategies are described below:
Day trading Bitcoin enables you to make the most of Bitcoin’s daily volatility. This means that you’ll open and close a position within one single trading day. So, you won’t have any Bitcoin market exposure overnight, and you’ll avoid overnight funding charges on your position.
Trend trading Bitcoin means taking a position that matches the current trend.
Hedging Bitcoin means mitigating your exposure to risk by taking an opposing position to the one you already have. For example, if you were concerned about a short-term drop in the value of Bitcoins you owned, you could open a short position on bitcoin with CFDs. If the market price of bitcoin falls, the gains on your short position will offset some or all of the losses on the coins you own.
The ‘HODL’ Bitcoin strategy involves buying and holding Bitcoin. However, you should only buy and hold Bitcoin if you have a positive outlook on its long-term price. If your research or trading plan indicates that you should sell your positions to take profit or limit loss, you should automatically set stop losses to close your positions.
Trading Bitcoin derivatives means that instead of owning Bitcoin outright, you’ll be speculating on its price with CFDs. Let’s discuss the trading options below.
Margin Trading
A cryptocurrency margin trading platform is among the easiest ways to short Bitcoin. Margin trading allows opening a trading position with leverage by borrowing funds from the exchange to make a trade. Margin involves leverage or borrowed money, which can increase profits or exacerbates losses. In most cases, the exchange provides loans to the traders to enlarge their capital to be used for margin trading.
Many Bitcoin exchanges and brokerages, i.e., Kraken and Binance, allow margin trading.
Futures Trading
In futures trading, a buyer agrees to buy or sell an asset at a later date for a fixed price. Traders typically use them to hedge other investments or to lock in profits when trading in volatile markets. If you buy a futures contract, you are betting that the price of the security will rise. If you sell a futures contract, it suggests a prediction that Bitcoin will decline in price. In this context, you can short Bitcoin by purchasing contracts that bet on a lower price for the cryptocurrency.
At the end of 2017, the Bitcoin price dropped significantly by approximately 70% over the two months. Since the introduction of Bitcoin futures coincided with this market crash, it is said that futures trading might have caused the market crash.
Bitcoin Futures Contracts are available on a wide variety of platforms. You can short Bitcoin futures at the Chicago Mercantile Exchange (CME), the world’s biggest derivatives trading platform, on multiple cryptocurrency exchanges, such as Kraken or BitMEX, and at popular brokerages such as eToro and TD Ameritrade.
Binary Options Trading
Binary options trading also enables traders to short Bitcoin. You need to execute a put order with an escrow service, meaning you would be able to sell the currency at today’s price, even if the price drops later.
You predict if the price of Bitcoin will rise or fall in a certain amount of time. If you’re correct, you earn the option’s payoff; if you’re incorrect, you lose your investment. Each Bitcoin binary option also has a specific payoff that you can win.
Binary options trading is available through several offshore exchanges, but the costs (and risks) are high. One of the advantages of using binary options trading over futures is that you can limit your losses by choosing not to sell your put options. Your losses will be limited to the price that you paid for the put options.
Popular crypto trading exchanges for binary options trading are Deribit and OKEx.
Leveraged Trading
Leveraged shorting means you can borrow more money from the exchange than you actually own there to buy the Bitcoins you want to short. It allows an investor to gain more exposure to an investment than they would’ve been able to afford if they had used only their available cash.
Leverage increases both the upside and downside of a position and the returns on an asset. In addition to increased risk, an investor will have to pay the lender for borrowing their money. When an investor utilizes leverage, a given price increase in their asset will result in greater profits. The same logic applies when the asset decreases in price, which results in the investor realizing greater losses. The amount of leverage is measured by the multiples of exposure relative to the equity provided by the investor.
Trading CFDs
Contracts for differences (CFD) are derivative instruments that enable traders to speculate on a wide range of financial markets without taking direct ownership of the underlying asset. It pays out money based on the price differences between the open and closing prices for settlement. Bitcoin CFDs are similar to Bitcoin futures in that they are essentially bets on the cryptocurrency’s price. When you purchase a CFD predicting that Bitcoin price will decline, you are shorting Bitcoin.
Unlike Bitcoin futures, which have predetermined settlement dates, CFDs have flexible dates. Bitcoin CFDs also do not require physical delivery of the cryptocurrency. Therefore, you do not have to spend on custody charges. In certain Bitcoin CFD markets, traders can enter into a contract based on Bitcoin’s performance or its performance relative to fiat currency or another crypto. The cryptocurrencies are traded as pairs against regular currencies.
Prediction Markets
Prediction markets should also be considered while shorting Bitcoin. They allow users to guess the outcome of various events to bet on these events and claim winnings.
One of the strongest points of Bitcoin prediction markets is that they are decentralized, meaning the results are always accurate, and everybody can confirm them.
Another great thing about Bitcoin prediction markets is that investors can create an event to make a wager based on the outcome. You could, therefore, predict that Bitcoin would decline by a certain margin or percentage, and if anyone takes you up on the bet, you’d stand to profit if it comes to pass.
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