It’s no secret that Bitcoin (BTCUSD) has been on a tear lately, with the price reaching new all-time highs almost every day. But some experts believe there is a way to profit from the fall of Bitcoin.
In this comprehensive guide, we’ll show you how to short Bitcoin so that you could make money even when prices are falling.
Here’s what we’ll cover in this guide:
What is short selling?
Short selling, or simply ‘shorting,’ is an investment strategy whereby a trader seeks to benefit from a decrease in the price of an asset.
To do this, a trader borrows the asset from a broker, sells it at the current price, and buys it back at a later time when the price has fallen.
The difference between the price when the asset is sold and bought back is the profit the trader will make.
Shorting is a way to potentially make a profit even when prices go down and is also useful for hedging against possible losses in a crypto portfolio.
Shorting is a common investment practice in the traditional markets but has recently been adopted for the cryptocurrency space, allowing crypto traders to bet on falling prices.
Shorting Bitcoin involves selling it at a particular price and then buying it back when the prices go down to complete the buy-low-sell-high circle in reverse.
What Are the Advantages of Short-Selling Bitcoin?
1. The potential to make a large profit with a small investment
Short-selling Bitcoin can help make a large profit with a small investment by leveraging the potential for returns.
If a trader believes that the price of Bitcoin will drop, they can borrow funds to increase their investment and take a short position.
If the price of Bitcoin does indeed drop, the trader can make a large profit from the price difference.
However, due to the risk of leverage and the potential of unlimited losses, this strategy is only recommended for experienced traders.
Therefore, those considering short-selling Bitcoin should be aware of the risks before investing.
Read more: How to Buy Bitcoin
2. Ability to profit from falling prices
Short-selling Bitcoin can help you profit from falling prices by enabling you to borrow and sell the asset when prices are high and then buy back the asset when prices have dropped.
This means that you can take advantage of the volatile market by buying when prices drop and selling when prices surge.
Furthermore, leveraging products like futures contracts and options can allow you to make money from a declining Bitcoin price without actually selling your holdings.
Remember that short-selling involves high costs and risks and that losses can be magnified if the price does not move in the direction anticipated.
3. Opportunity to diversify the portfolio
Short-selling Bitcoin can help diversify a portfolio by allowing investors to hedge their existing holdings, or to bet against a coin and make money if it goes down in price.
By taking a short position and leveraging their capital, they can increase the potential returns while also reducing the potential losses.
Moreover, by using options and futures contracts, or trading on margin, investors can maximize their profits without having to commit too much of their own capital.
Shorting crypto can also be used as a hedge during bear markets, allowing investors to ride out the dip and protect themselves from losses.
Ultimately, short-selling Bitcoin can be a powerful tool for diversifying and managing risk in an investor’s portfolio.
4. Access to instruments that are not usually available to retail traders
Instruments not usually available to retail traders but available to short sellers of Bitcoin include CFDs, margin trading, and leverage trading.
CFDs allow traders to “profit from price movements in the financial markets without owning the underlying instrument.”
Leverage trading lets traders maximize their earning potential regardless of the market situation, with many platforms offering up to 5x margin.
Finally, copy trading enables traders to copy the short trades of top-performing traders, allowing them to experiment without having to commit real money.
5. Low barrier to entry
Short-selling Bitcoin can help to reduce the entry barrier for retail investors, as it enables them to take advantage of market movements without needing to invest large sums of capital.
By utilizing margin trading, traders can leverage their capital to open short positions with a smaller margin requirement.
This is particularly beneficial for retail investors as it allows them to get into the market with a much lower capital requirement.
Additionally, the variety of trading options available, such as those offered by established crypto exchanges, can provide traders with the flexibility to take advantage of market movements without incurring high maker/taker fees or risking liquidation penalties.
Ultimately, short-selling Bitcoin can help reduce the entry barrier for investors of all levels, allowing them to take advantage of market opportunities with a much lower capital requirement.
6. Potential for high returns with high volatility
Short-selling Bitcoin can be beneficial in terms of high returns with high volatility due to its erratic price movements.
By taking a short position, investors can capitalize on any price drops and potentially make massive gains.
Leverage trading also allows traders to increase their potential returns by borrowing funds to increase their investment.
However, shorting comes with risks, so investors must employ appropriate risk and trade management strategies to mitigate any losses.
7. Ability to hedge against Bitcoin
Shorting Bitcoin can help to hedge against the cryptocurrency by allowing investors to bet against it and maximize their earning potential by taking advantage of the bull and bear cycles.
It can also be used by those who do not believe in the blockchain revolution message to benefit from the asset’s potential eventual fall.
By taking up short positions, investors can offset any losses from their long-term positions and protect their portfolios from unwanted losses.
Additionally, traders can take advantage of the funding rate reward offered by exchanges with perpetual futures contracts.
Through short selling, investors can use the market’s volatile nature to their benefit and potentially generate huge gains.
8. Ability to use margin trading
Short selling Bitcoin enables traders to use margin trading by borrowing funds from an exchange or broker to purchase a certain amount of cryptocurrency.
When the value of the crypto increases, the trader can sell it for a profit. However, if the value of the crypto decreases, the trader may be required to deposit additional funds or sell the securities and pay back the borrowed funds.
By using margin trading, traders can maximize their starting capital and potentially their profits.
Binance allows users to borrow funds to use across any trading pair on the platform, which is typically leveraged up to 3x and enables traders to short any asset that’s supported by the Binance markets.
9. Ability to short Bitcoin CFDs
Short-selling Bitcoin CFDs can be a great way to make money in the cryptocurrency market. CFDs are a form of derivative contracts that allow traders to speculate on the future price of an asset without actually owning it.
This means that traders can take a short position and make money if the price of Bitcoin goes down.
The leverage offered by CFDs is another major benefit. Leverage allows traders to control a much larger position than their actual capital.
This can be used to amplify gains but also can be risky if the market goes against their prediction.
Finally, CFDs are unregulated and therefore easy to use with no commission charges.
This makes them a great option for traders looking to short Bitcoin without having to find someone to lend them the asset.
10. Ability to short Bitcoin on binary options trading platforms
Short-selling Bitcoin through binary options trading platforms is a popular investment strategy.
To do this, simply choose a short-term contract and place your bet. If the price of Bitcoin falls within the specified time frame, you will earn a profit.
Here are the steps for short-selling Bitcoin through binary options trading:
- Choose a binary options trading platform. Popular venues include Deribit and OKEx.
- Select the type of option you wish to trade. If you wish to short the currency, you’d execute a put order.
- Choose the time frame you wish to trade. Binary options are short-term contracts, and you can select a timeframe that suits your strategy.
- Place your order. Select the size of your order and the price you are willing to pay for the option.
- Monitor your position. If the price of Bitcoin falls within the specified time frame, you will earn a profit. If it increases, you will incur a loss.
- Close your position. Once you have achieved your desired profit or loss, you can close your position by selling the option.
How To Short Bitcoin
How To Short Bitcoin
Figure out when shorting is right for you
When deciding when to short Bitcoin, there are several factors to consider. First, it is important to be knowledgeable about technical analysis and the risks involved with shorting.
Second, it is important to have a clear exit strategy in place before entering a short position and to remain disciplined and patient when trading.
Third, it is also important to have a risk management plan and to practice trading strategies on small sizes before entering any trades.
Finally, it is important to recognize when bullish factors are not present in the market, rather than only looking for bearish factors. By keeping these factors in mind, investors should be able to make sound decisions when shorting Bitcoin.
Choose a venue for your short sale
When considering a venue for a Bitcoin short sale, it is important to consider the fees, the availability of leverage, and the margin requirements of the platform.
Maker/taker fees are generally charged at the time of the transaction, so it is important to compare fees between different venues. Additionally, some platforms offer leverage up to 5x, whereas others may limit leverage to 2x or 3x.
Lastly, some venues may require specific margin requirements, meaning they may require additional funds to be deposited in order to cover the borrowed assets.
Ultimately, the best venue for a Bitcoin short sale depends on an individual’s risk appetite, trading goals, and financial capabilities.
Learn how to use the platform safely
Here are step-by-step instructions for shorting Bitcoin safely on any platform:
- Head to the platform of your choice and log in or sign up.
- Select Trade > Margin trading from the top menu, choose the Bitcoin you want to short, and you’ll be redirected to the trading interface.
- Enable margin trading if you haven’t done that before. Afterwards, you’ll see two options on the trading interface, Long or Short. Enter the amount you want to short and click the Sell/Short button.
- You’ll receive a prompt to confirm the trade. Click Sell/Short again to successfully open the short position.
- Ensure that you enable two-factor authentication (2FA) for added security while trading online.
- Monitor the position and take necessary actions to close the position and realize the profits.
Create your trading strategy and execute it accordingly
Creating a trading strategy and executing it accordingly to short Bitcoin is a complex process that requires knowledge, patience and dedication. To successfully undertake this type of trading, it is important to follow a step-by-step process:
- Choose a time frame. Decide on a time frame that aligns with your trading goals and strategy. This can range from a 1-minute chart to a 1- or 4-hour chart.
- Be patient. Crypto markets are volatile and there are usually trading pairs experiencing price action. However, if the market is slow it is important to be patient and wait for the ideal set-up to appear.
- Stick to your plan. Make sure to have a structured trading plan and practice it on small sizes to find out what works for you.
- Risk management. Proper risk management is essential when trading with leverage. Be sure to use stop losses, plan how much you are willing to risk, and have adequate collateral.
- Open an account with an exchange. To short Bitcoin, you need to have a trading account set up that offers peer-to-peer trading.
- Trade execution and management. Before executing your position, make sure to map out your entry and reason for entering, your potential profit target or targets and a stop-loss zone.
- Take breaks. Day trading and scalping are intense and require high levels of focus. Make sure to take the appropriate breaks if you are actively trading.
- Consider practising on a demo account. Many crypto exchanges offer demo or simulation trading accounts where you can practice short selling without risking any collateral.
Monitor the market conditions and react accordingly
Monitoring market conditions and reacting accordingly when shorting Bitcoin requires a good understanding of technical analysis and the risks associated with the activity.
There are several tools that can be used to help with the process, including the Relative Strength Index (RSI), Bollinger Bands, Moving Averages, the Standard Deviation indicator, and Average Directional Index (ADX).
Keep an eye on your margins and keep a close watch on costs
- Calculate the fees you will incur for taking a short position. This will depend on the exchange you choose to use and its fee structure. Typically, taker fees are higher than maker fees as you’re removing liquidity from the market instead of providing additional tradable funds.
- Consider any liquidation fees. This is the percentage the exchange charges as a penalty for exceeding your margin ratio. Liquidation penalties vary depending on exchanges, so be sure to check this before you trade.
- Set a stop loss amount. Market volatility and risk management are the most important factors when taking any trade. Before entering a position, set a stop loss or exit strategy at an amount you’re willing to risk.
- Monitor your position regularly. Check your position’s progress and make sure it is within your risk tolerance level. If the price of crypto keeps going up instead of down, you may need to adjust your strategy or exit the position.
- Don’t forget to take profits when the opportunity arises. Crypto markets are volatile, so be sure to stick to your plan and exit when the time is right.
Know the risks of shorting Bitcoin before you do it
The risks of shorting Bitcoin include limitless losses due to sudden price spikes, margin interest build-up, and the potential for a trader to not understand the market and make mistakes.
Additionally, there are a variety of different order types and other strategies that can help minimize risk when trading Bitcoin.
It is important for traders to understand the different types of orders and use risk management features such as taking profit and stop-loss orders to ensure structured and consistent trading.
Furthermore, new traders should consider practising on a demo account before risking capital on a live trading account.
Conclusion
Bitcoin short selling can be a great way to profit from market volatility.
However, it is important to understand the risks involved and to have a solid strategy in place before you begin.
We hope this guide has given you the information you need to get started short-selling Bitcoin.
Shorting Bitcoin – FAQs
What is Bitcoin shorting?
Bitcoin shorting is an investment strategy where a trader seeks to benefit from a falling price of the cryptocurrency.
The investor borrows the Bitcoin from a broker, sells it, and then buys it back after the price has dropped to make a profit (or loss). This process is the opposite of buying low and selling high.
To do this, the investor needs a counter currency, like USD, ETH or EUR, depending on the market.
The benefit of shorting is that the trader can make a profit even when the market is declining. However, it’s a risky endeavour and should only be done with the money that you can afford to lose.
A practical example of shorting Bitcoin is if you borrow five Bitcoins, sell them for $100,000 ($20,000 each) and purchase them back when the price falls 20%, making a $20,000 profit.
What are the risks of shorting Bitcoin?
The risks of shorting Bitcoin include limitless losses due to price spikes, margin interest build-up which could negate profits, and price risk due to the volatility of the underlying asset.
There’s also the regulatory risk due to trading venues being unregulated, profit being limited to the price of Bitcoin not dropping below zero, and high leverage rates meaning liquidation prices are too close to the entry price.
Moreover, traders must always be aware that their capital is at risk when trading.
How do I short Bitcoin on a trading platform?
- Open an account with an exchange. To short Bitcoin, you must have a trading account set up that offers peer-to-peer trading. This means there is an order book with traders posting bids and offers instead of a broker that only allows basic buying and selling.
- Understand short-selling risks. Short selling is typically associated with the use of leverage. If you plan on trading using leverage, ensure you have the appropriate risk management strategies, including stop losses, correct position sizes and adequate collateral.
- Trade execution and management. Do not enter a trade blindly. Before executing your position, you should have mapped out your entry and reason for entering, your potential profit target or targets and a stop-loss zone calculated to suit your risk profile.
- Stick to your plan. Always stick to your plan and never enter a trade blindly. Focus on mastering one set-up and strategy, such as trend trading on the 15-minute chart. This will allow you to be comfortable and confident in your executions and give you the ability to spot set-ups more regularly.
- Take breaks. Taking breaks from trading is important for maintaining your mental and emotional well-being. Taking regular breaks can help you stay focused and avoid making costly errors.
- Place short sell order. After understanding the risks involved in short-selling Bitcoin and setting up a trading strategy, you can place a short-sell order. This order will allow you to borrow Bitcoins from a broker and sell them with the expectation that you will buy them back later at a lower price.
How is margin trading different from regular Bitcoin trading?
Margin trading is different from regular Bitcoin trading in that it involves borrowing funds from a broker or exchange to purchase a larger amount of Bitcoin than what is initially available in the trader’s account.
This allows traders to trade larger amounts and potentially generate higher returns, but it also carries with it a greater risk of losing more money than they initially invested.
As such, traders must pay interest on the borrowed funds, as well as having to deposit additional funds with the broker in the event that the value of the cryptocurrency decreases.
Furthermore, unlike regular trading, short selling with margin trading involves buying and selling the cryptocurrency at different prices over time, and pocketing the difference as profit.
What is the difference between futures trading and options trading?
Futures trading and options trading are both forms of derivatives — financial instruments that derive their value from an underlying asset.
The main difference between the two is that options give the holder the option, but not the obligation, to buy or sell an asset at a certain price during a specific period of time while futures contracts require pre-agreed transactions to take place on a set date.
Put options can be used to short Bitcoin, allowing an investor to lock in a price and hope to buy back the asset at a lower price in the future. Futures contracts, on the other hand, are obligated; if the price of Bitcoin falls, the investor must go through with the transaction.
Binary options also enable traders to short Bitcoin. These contracts let buyers buy or sell an asset in the future at a set price, called a strike price. Call options allow the holder to buy the asset at a lower strike price and put options provide the holder with the ability to sell the asset at a higher strike price.
Options trading can limit an investor’s losses by choosing not to sell their put options, while futures trading exposes them to the full risk of the market. Both futures and options trading requires advanced knowledge of derivatives and carry fees, called a premium, for opening a position.
What are the fees associated with shorting Bitcoin?
Shorting Bitcoin comes with several fees and costs associated. These include trading fees, which vary by platform and are split into maker and taker fees; margin fees, which are daily recalculated depending on market conditions; other platform fees such as withdrawal fees; and taxes on realized profits.
It’s important to factor in all of these fees before making a decision to short Bitcoin.
What type of investor should consider shorting Bitcoin?
Individuals who should consider shorting Bitcoin include those looking to hedge risks, maximize earnings potential, and capitalize on Bitcoin scepticism.
Experienced traders who can endure the risks associated with shorting can potentially make great profits if done correctly. Shorting Bitcoin may also be an attractive option for those looking to benefit from corrections or sharp price declines.
However, due to Bitcoin’s potential for long-term gains, those who are comfortable in the markets may prefer to hold it in the long run.
What tools and strategies can be used to short Bitcoin?
When it comes to shorting Bitcoin, there are several tools and strategies available to traders. The most popular and commonly used is margin trading, which allows you to borrow money from a broker in order to make a trade.
This form of trading involves leverage, which can increase profits or exacerbate losses. Many exchanges and brokerages such as Kraken, Bitfinex and Bitmex offer margin trading.
Other tools and strategies used to short Bitcoin include futures trading, binary options, inverse exchange-traded products (ETPs), Bitcoin CFDs, spot margin trading, and standard asset selling.
Futures trading allows traders to make a bet on the future price of Bitcoin. Binary options involve predicting whether the price of Bitcoin will go up or down, while inverse ETPs involve betting against Bitcoin.
Bitcoin CFDs involve taking short positions on Bitcoin, while spot margin trading allows traders to borrow Bitcoin from an exchange in order to make a trade. Finally, standard asset selling involves selling Bitcoin that you already own.
No matter which tool or strategy a trader chooses to use, it’s important to understand the risks associated with shorting Bitcoin.
Margin trading carries a large amount of risk, and it is important to be aware of the potential for losses before engaging in this type of trading. Additionally, it is important to understand the potential for volatility in the cryptocurrency markets, as prices can rapidly change with little warning.
What are the benefits of shorting Bitcoin?
The benefits of shorting Bitcoin include loss hedging, beating the volatility, better valuation, low capital requirement, and the potential to generate a profit in a down market.
Shorting also provides an opportunity to speculate on a decreasing Bitcoin price and benefit from its erratic price movements. Additionally, it can help an investor hedge their portfolio against downside risk.
It’s important to note, however, that shorting comes with risks, and investors should employ appropriate risk and trade management strategies to mitigate any losses that may result from Bitcoin’s volatility.
