Short Bitcoin is a suitable investment strategy for investors who believe that the price of Bitcoin will decrease in the future. While short selling can be highly profitable, it is also risky and can have serious consequences for investors and the market if not done properly. So, how to short Bitcoin effectively? Let’s find out with CoinMinutes through the article below.
How to Short Bitcoin in 2023?
There are many different ways to short Bitcoin, with their pros and cons also varying. Here Coinminutes will give you some methods through which you can shorten Bitcoin:
One of the ways to short Bitcoin is through a cryptocurrency margin trading platform. Short selling Bitcoin using margin trading means you need to mortgage an amount of money or asset (margin) to the platform, they will lend you the amount of Bitcoin corresponding to the margin value, and then you sell that amount of Bitcoin according to the market price.
- If the price drops, you can buy back the Bitcoin at a lower price and return it to the lender. The profit you make is the difference between the selling price and the buying price.
- If the price increases, you will have to pay that higher price, whatever that price is, to buy back the Bitcoin and pay it back to the lender.
Profits are paid immediately, but losses must be paid in full. Margin trading can multiply your profits by shorting Bitcoin. And of course, any losses you make are multiplied the same way. Margin interest payments on borrowed Bitcoin can add up to quite a large amount over time. If not replenished in time, the position will be liquidated, causing losses. This multiplication of profits and losses in margin trading is called leverage.
Many cryptocurrency exchanges offer margin trading on their platforms at this stage such as BitMex, AVAtrade, and Plus500.
Bitcoin, like other assets, has a futures market. In a futures transaction, a buyer commits to purchase a security with a contract specifying the future time and price at which the security will be sold. You can be a seller or a buyer in a futures contract. As a seller, you sell Bitcoin futures to another trader. That means you agree to sell an agreed amount of Bitcoin at an agreed-upon price to whoever is holding that Bitcoin future when it expires.
If the price of Bitcoin falls on the expiration date, the short seller can buy back the Bitcoin at a lower price to close the contract and sell it to future holders at the agreed price, enjoying the price difference.
And vice versa, if the price of Bitcoin increases on the expiration date, the short seller buys at a high price and sells to the contract holder at a low price, you will have to bear the difference.
Contract for Differences
Contracts for difference (CFDs) are another type of bet on the price change of an asset. The contract promises to pay the price difference between the opening and closing price of the contract. Instead of buying or selling, you sign an agreement that after a specific date, you will compare the market price of Bitcoin with the price in the CFD. And of course, you will hope the market price of Bitcoin will decrease when the contract end
- If the price is higher, you pay someone else the difference.
- If the price is lower, the other person will pay you the difference.
There is no need to own Bitcoin, but the risk is higher than direct investment because it depends on market price movements. Contracts for difference allow for more convenient short selling but require careful risk management.
Inverse Exchange Traded Products
Exchange-traded products (ETPs) are derivatives linked to the price of an underlying group of assets. If the derivative is ‘long’ of those assets then it is a traditional equity (ETP).
An inverse ETP is similar, except it involves shorting a group of assets. Inverse ETPs are investment products traded on stock exchanges, whose value is inverse to the underlying asset, such as Bitcoin. For example, there is an ETP called BTCSHORT, whose value increases when the price of Bitcoin drops. To short Bitcoin, investors buy shares of the BTCSHORT product.
- If the price of Bitcoin decreases in the future as expected, the price of BTCSHORT will increase and investors will profit.
- On the contrary, if Bitcoin price increases, BTCSHORT will decrease in price and cause losses.
This method is convenient but still indirectly depends on Bitcoin’s price fluctuations.
Binary Options Trading
Binary Options Trading gives you the option to sell Bitcoin in the future at the price agreed upon in the contract. You pay a one-time fee (called a premium) to set up the put option. When the option expires, you can choose whether or not to exercise it. To short Bitcoin, an investor buys a binary put option contract with the prediction that the price of Bitcoin will fall below a predetermined price.
- If the market price is lower than the agreed price, you can make a profit by buying Bitcoin and then selling it to the holder of your put option.
- If the market price is unfavorable, you can let the put option expire and you only lose the premium you paid to establish it.
Binary Options Trading methods are available through some offshore exchanges. This method does not require owning real Bitcoins and can profit as soon as the contract ends. However, the risk is also high because there are only 2 possible outcomes.
Tips for How to Short Crypto
As the largest cryptocurrency, Bitcoin’s price is unlikely to fall close to zero for a very long time. As a Bitcoin short seller, it is important to understand your main source of profit is the daily volatility of Bitcoin, not the expectation of a large and permanent price drop. Therefore, it is necessary to continuously monitor the market to be able to close and open positions promptly.
If you believe Bitcoin is overvalued then short selling is one way to profit from that knowledge. Being overvalued means that everyone trading it thinks it is worth much more than it actually is. As more people realize and sell, the price will theoretically drop to the correct value over time.
In addition, you need to use reputable exchanges and units to minimize the risk of being scammed. Consider the appropriate risk level for you, and avoid trading with too much leverage.
Crypto Shorting Pros and Cons
- Investors have the opportunity to profit even in a bear market.
- Without needing too much initial capital, short selling can bring large profits.
- The purposes of short selling include speculating for profits, hedging portfolio risks, and taking short positions.
- When investors borrow money to execute short orders. Accordingly, they are not only at risk of losing the initial capital they spent but also owing more money than they borrowed (assuming the investor borrows in one place and shorts in another).
When Should You Consider Shorting Bitcoin?
There are several times when you should consider selling Bitcoin:
When the Bitcoin market is in the final phase of a strong bull cycle. This is the time when after a long bull market cycle, the trend of collapse or strong downward adjustment is inevitable.
When negative warning signals appear such as increased selling pressure, reduced liquidity, slowing down momentum, or reversal. These indicate excess supply and reduced trading volume, which could pull prices down.
Therefore, you should take the opportunity and short Bitcoin to profit from the short-term downtrend.
The above article has introduced an overview of shorting Bitcoin and how to short Bitcoin effectively that CoinMinutes has compiled. Hopefully, with the above sharing, you can earn yourself an effective source of profit.