Shorting bitcoin is an investment strategy that allows traders to gain from price drops. This concept works well for investors who are skeptical about Bitcoin’s future. When shorting, an investor borrows Bitcoin and sells it at the current market price. Later, you buy it back. This is done with the hope that by the time you are repurchasing the Bitcoin, the value will have plunged. And this means that if the value decreases it, you could purchase it back at a lower value and now have more of it. One factor you have to take into consideration is leverage. Leverage refers to the amount that you will borrow in order to execute your trading position. Leverage is calculated as a proportion of your total trade.
However, it is essential to note that shorting is a risky and challenging strategy. The trader needs to have experience of the market, be a skeptic, and have the skills to utilize some of the complicated procedures. Shorting needs knowledge and patience. Considering that the crypto market is volatile, traders need to understand all the available options for shorting BTC. In this guide, we look at different ways you can short Bitcoin.
This is the ideal way of shorting BTC or other crypto assets. Margin trading entails borrowing funds from a cryptocurrency exchange to purchase a digital asset. To short Bitcoin, you will need to use FIAT currency and buy the asset. You will the short sell it, and purchase back after the market crashes. Typically there’s some interest or leverage attached to the loan. As the cryptocurrency market grows, more exchanges are enabling margin trading. You can enjoy this feature on platforms like BitMex, Ava Trade, Bitfinex, among others.
Margin trading is also risky. In the event your plan is shuttled, the trading platform will close your trade sooner than you expected simply because margin trading magnifies both gains and loses.
It works when a buyer and a seller come to an agreement to trade their Bitcoin or other assets at a specific set price in the future. The two are bound by a contract that spells out the terms of the trade. Typically, when you get a Bitcoin futures contracts, there is a likelihood that the price of the asset will rise. At least that’s what the crypto community see it. In reality, nothing’s for sure.
On the other side, when you sell a Bitcoin Futures contract, it translates to a bearish mindest, and the asset might drop in value. In this type of trading, you’re predicting with the hope that the price of Bitcoin will go up. That way, when your contract expires you can buy Bitcoin below the market price. However, Bitcoin futures markets are a bit difficult to find. Note that margin trading patterns exist in the professional trading world. However, platforms like OrderBook.net and Exante offer these services.
CFDs Bitcoin Shorting
Using online CFD brokers enables you to short Bitcoin. This works for retail investors who do not have an account with a broker that supports CME/CBOE bitcoin futures contracts. Platforms like eToro, AvaTrade or Plus500 offers Bitcoin shorting on CFDs on retail brokerages. CFDs (contracts for difference) work in a similar manner like futures contracts but are tailored towards retail investors. In this case, traders can bet on a price increase or decrease of Bitcoin without having to own it physically.
Note that CFDs are leveraged products and they allow traders to go long or short Bitcoin using margin. Therefore, traders only have to put down a percentage of the total amount of the trade-in order to open a position. In the end, traders are able to magnify their returns if their bet pays off but also carries increased risk as losses are also magnified if the price plunges.
Bitcoin Shorting via Binary Options
Traders can also short Bitcoin through the options trading. This model involves put and call options. Here, traders with a put option contract, have the right to sell a specified amount of Bitcoin, which you set, at a certain price at a certain period. This approach is known as the strike price. With time, the put option gains value as Bitcoin loses value compared to the strike price. Note that you are not obligated to sell the option if you don’t want to. On the other hand, a call option contract offers you the right to buy shares in the same way. This contract gives you an option to buy a certain amount of Bitcoin at a specific price until the expiration date.
You can short Bitcoin through prediction markets that work in a similar manner like gambling. In this case, you predict its price, and when you are correct, you earn a certain profit. Prediction markets are exchange-traded markets created to trade the outcome of future events. This new market feature allows traders to predict that bitcoin would decline by a certain margin, and if anyone takes you up on the bet, you will stand to profit if it comes to pass. Augur is the pioneer prediction markets on the blockchain. Other platforms to use prediction markets include Gnosis and Stox.
Risks Associated with Bitcoin Shorting
As seen above, shorting Bitcoin can be risky. The entire cryptocurrency market is extremely volatile. Based on this volatility, when you short Bitcoin, you can make profit or losses. Based on its value when short selling, your losses can extend far beyond your initial investment. Shorting Bitcoin should be done when you are confident that the prices will drop. Always monitor cryptocurrency prices and lower your losses if it starts to rise quickly. With the volatility of the cryptocurrency markets, it’s essential to understand all your options, especially if one involves hedging your future if the markets crash.
Another risk of shorting is that your losses are unlimited. If you dont have a strong strategy – you might end up with your entire balance liquidated. Therefore, we recommend you to try with a few testing funds.
We hope that this article helped you understand a bit about shorting. Through the act of borrowing Bitcoins, selling them when the price is high and then repurchasing them when the price is low, you can earn money even when markets are on the decline.
Usually shorting is not recommended for traders who are just starting because of the high risk it involves. If you decide to do it, make sure you only invest money you can afford to lose. Also, make sure to stay up to date with current related events so you can anticipate any change in the price direction. We hope this review helped you understand more about shorting bitcoin and made things a little bit more clear.
Image Source: hacked
Subscribe to our Newsletter to be a part of our future $1,000 per month contests.