How to Short Bitcoin

how to short bitcoin

If you want to know how to short Bitcoin, let’s first ensure you have an understanding of what short selling is.

What is Short Selling?

What is short-selling? What does it mean to “short Bitcoin”? Let’s dig in and discuss how to short Bitcoin:

  • Short selling is a combination of borrowing assets and foretelling market prices (more specifically, market crashes).
  • If you truly believe (and have done your research) that a market price is going to crash then short selling could be a wise investment call.
  • Usually, the asset is “rented” to the short seller and it is in this way financially beneficial for the lender to allow an asset to be borrowed.
  • In order to turn a profit on a short sell, you must sell the asset for a higher price than you pay when buying the same asset back later.
  • Taking Bitcoin as the asset: You borrow one Bitcoin and then sell this Bitcoin in the marketplace at its current value (say 10k).
  • Remember you are selling it expecting the market value to crash soon.
  • So now you have sold the bitcoin for a cash value of 10k, but you still own the lender back its Bitcoin.
  • If the market moves in your favor and prices drop, you will now buy-back a bitcoin – but you are now buying it back at a cheaper market price than when you sold it (say its now worth 5k).
  • In this way, you have now made a profit – you now have one Bitcoin again plus the cash difference between the original selling and rebuying prices.
  • You repay the lender the one Bitcoin that you borrowed and cease paying any “rent” (Leverage fees or rental fees vary by institution and can greatly impact the overall profit of the short sell).
  • And the cash value difference (minus rental fees) is yours!  

In short, short-selling is a method of investing that allows investors to benefit from fluctuating marketplaces where the drop in price and value of an asset is constantly changing – such as Bitcoin. As Bitcoin and other digital assets have made enormous gains in 2017, some analysts have predicted that Bitcoin is likely to crash at some point in the future. Due to this reason, shorting the currency is a good option.

Let’s illustrate the profit potential with a short example:

    • A user short sales 10 Bitcoins when the price is $4,000
    • Now, a user gets  $40,000 for those 10 Bitcoins
    • Price of Bitcoin drops to $3,500
    • User repurchases 10 Bitcoins to give back to the person or organization at $3,500 per Bitcoin. This equals $35,000.
    • Total profit gained from this short sale is: $40,000-$35,000 = $5,000

 

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How to Short Bitcoin

With the availability of a various number of trading companies and online platforms, a user can place a request for short sell. Some of the trading companies lend Bitcoins from their existing stock of cryptocurrency, while others choose peer-to-peer credit from other users. It is important to understand that there may be a leverage factor, which can result in an increase in profits or losses.

The trading agencies enable users to repay them later irrespective of the Bitcoin price. For example, if a user borrows 10 Bitcoins, the user will eventually have to repay those 10 Bitcoins, whether prices soar or fall.

During a short-sell, an organization or an individual who allowed the customer to borrow Bitcoins can recall their assets at any time and customers are provided short notice. So, it is imperative for users who opt for the short sell of any digital asset to be aware of rules, regulations, and guidelines. With the fluctuation of market rates, short selling could be risky as a lender may recall all the assets before the prices are likely to drop. Also, exchanges can close customers accounts any time.

Ways to Short Bitcoin

Short Sell CFDs

One of the most commonly used methods to short Bitcoin is through a Contract for Difference or CFDs. A CFD is a contract between two parties (buyer and seller), who speculate on the rates of an underlying asset, such as Bitcoin. In this case, the buyer and seller agree to pay any difference as prices rise or fall in cash, without having to own the coin physically. Some of the Bitcoin CFD platforms such as AvaTrade or Plus 500 allows Bitcoin shorting and these platforms do not hold Bitcoins. While trading using the CFD method, users must be attentive as it can result in the loss of entire capital.

How To Short Bitcoin via a Bitcoin Exchange

Many professional cryptocurrency traders opt for one of the major cryptocurrency exchanges to short Bitcoin. Some of the exchanges that offer short support as a matter of course, are Kraken and GDAX, whereas some exchanges like Bitfinex allow for leveraged shorting too. Although several exchanges offer short Bitcoin, customers shall select a reputable exchange.

How to short Bitcoin Through a Futures Trade

Bitcoin shorting can be done through a Futures trade. In this type, a buyer agrees to buy a security with a contract that specifies when and at what price the security will be sold. Sometimes, a customer buys a futures contract with an assumption that the price of the security will rise and can avail of a good deal on the security later on. However, if a customer sells a futures contract, it reveals a bearish mindset as he or she will predict that Bitcoin prices will decline. Most of the reputable exchanges such as Nasdaq, Chicago Mercantile Exchange (CME), and most recently added Chicago Board Options Exchange (CBOE) are available for Bitcoin futures trade.

How To Short Bitcoin through Put Options

BitMEX is a specialized exchange, which offers Bitcoin options trading. Specifically, options are contracts that grant the right, but not the obligation to deal with an underlying asset at a specific price before a certain date. An ability to buy is known as a call option and the right to sell is a put option. Options trading is recommended for people with experience in cryptocurrency trading and is not suitable for beginners.

Analyzing Markets for Short Sell Opportunities

Another way to consider shorting Bitcoin is by analyzing the Bitcoin market meticulously as several past events have caused major sell-offs. Some of the events that are expected to have a negative impact are:

  • The collapse of Mt. Gox, the world’s largest Bitcoin trading exchange
  • Hostile regulatory action in major countries and hostile action against Bitcoin mining companies by the Chinese government
  • Discovery of Bitcoin code threatened wallet security or network operation
    delays or setbacks in widely-desired upgrades such as SegWit
  • Breach of the cryptographic primitives used in Bitcoin (SHA256, secp256k1).

Can Shorting Bitcoin be Risky?

With short-selling of any asset, losses could extend far more than actual investment. And quite simply, the short seller will pay out much more money if the price of an asset constantly rises. While trading Bitcoins or any digital asset, an investor can lose the amount of money invested in that asset. For example, if a user invests $10,000 in a stock, and suddenly the stock collapses and turns to be insignificant; losses will be limited to the $10,000, which is same as the investment. Then on the other hand sometimes Bitcoins rates can increase twice the actual price and not fall as predicted. The ideal case is for the price to drop significantly so that you make a profit – but those are the odds you measure before deciding to invest in a short sell. 

On Concluding…

Short-selling any asset can be a risky venture and one needs to be careful. As crypto trading is particularly volatile there can be an excessive fluctuation of rates. This in effect means the result could very well go in your favor but likewise it may not and predictions can be difficult to make. Nevertheless, there are many people who have invested and gained huge profits through shorting Bitcoin.

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