Short selling BTC involves selling it using strategies like margin trading, futures market, binary options trading, BTC CFDs and prediction markets.
The rise of Bitcoin prices and increase in demand over time has captured the attention of investors worldwide. But what if you anticipate the price to fall instead? Shorting Bitcoin allows you to potentially profit from a price decline. Unlike buying Bitcoin and hoping it goes up, shorting lets you speculate on a downward trend. This guide explores five key methods for shorting Bitcoin, equipping you with the knowledge to navigate the exciting yet potentially risky world of shorting the Bitcoin.
How to Short Bitcoin in 5 Ways
1. Margin Trading
Shorting Bitcoin is straightforward on cryptocurrency margin trading platforms. Many exchanges and brokerages offer this service, letting investors borrow funds to trade. While margin trading can amplify profits, it also heightens the risk of larger losses due to leverage. Popular platforms like Kraken and Binance support margin trading, providing opportunities for investors to engage in this high-risk strategy.
2. Binary Options Trading
Call and put options are tools traders use to short Bitcoin. You execute a put order to sell Bitcoin at the current price even if it drops later. Binary options on several offshore exchanges come with high costs and risks. Unlike futures, binary options trading lets you limit losses by not selling your put options, with losses capped at their price. Deribit and OKEx are popular platforms for trading Bitcoin options, offering various features for managing trades and minimizing potential losses.
3. Futures Market
Bitcoin futures allow traders to agree on buying or selling Bitcoin at a specified future date and at a certain price. Buying indicates a bullish outlook, anticipating a rise, while selling suggests a bearish view, predicting a decline. Shorting Bitcoin involves betting on a lower price through futures contracts.
Futures trading gained popularity during the 2017 cryptocurrency surge and is traded on platforms like the Chicago Mercantile Exchange (CME), Kraken, and BitMEX. Brokerages like eToro and TD Ameritrade also offer Bitcoin futures. Perpetual futures, on platforms like BitMEX, have no expiration dates, allowing traders flexibility in their positions.
4. Short-Selling Bitcoin Assets
This strategy might not appeal to all investors, but those willing to take the risk can reap gains if their bet against Bitcoin's price succeeds. Sell your tokens at a favorable price, wait for the price to drop, and then buy back the tokens. However, you could incur losses if the BTC price doesn't drop as expected.
Short-selling Bitcoin involves high costs and risks, such as custody or wallet fees until the short selling or trade is triggered. You also face the risk of Bitcoin's price volatility. If the price rises instead of falling, you could suffer significant losses. Some exchanges offer leverage for such trades, amplifying gains and losses.
5. Using Bitcoin CFDs
A contract for differences (CFD) is a financial strategy where profits are based on the difference between the open and closing prices. Bitcoin CFDs are similar to futures, allowing traders to bet on the cryptocurrency's price. When you purchase a CFD predicting a price decline, you are shorting Bitcoin. Unlike futures, CFDs offer flexible settlement periods without fixed dates. In some Bitcoin CFD markets, traders can base contracts on Bitcoin's performance relative to fiat currency or another cryptocurrency, providing additional trading versatility.
Factors to Consider While Shorting Bitcoin
1. Bitcoin’s Inherent Volatility
Most methods to short Bitcoin rely on derivatives, which are affected by price fluctuations. For instance, Bitcoin futures mirror spot price changes and thus aren't suitable for hedging actual Bitcoin investments. Similarly, options trading can amplify losses due to Bitcoin's inherent price volatility.
2. Bitcoin as an Asset
Price volatility is just one of several risks when shorting Bitcoin. Established in 2009, Bitcoin is relatively new compared to other assets and lacks extensive historical data, making it difficult for investors to make informed decisions about its long-term viability.
Additionally, the Bitcoin or overall crypto market is prone to counterparty risks and lacks governamental control, eventually adding to the uncertainty. While established platforms like CME provide safer and guaranteed execution for Bitcoin derivatives, newer platforms can be unreliable, clunky, and more prone to security breaches. Therefore, thorough research and caution are essential when engaging in Bitcoin shorting or related derivative trading.
3. Regulatory Status
Cryptocurrency regulations are evolving globally. The U.S. has advanced with key court cases and the approval of various Bitcoin investment instruments. The European Union introduced the Markets in Crypto Assets (MiCA) legislation to guide its member states' cryptocurrency dealings.
However, due to regulatory compliance issues, several leading Bitcoin trading platforms, such as Deribit and OKEx, are inaccessible to American investors. This restriction poses challenges for U.S. investors who want to trade specific instruments or derivatives offered on these non-U. S. regulated exchanges, as they would lack legal protections if they engage in trading on such platforms.
4. Learning is Still Required
Before shorting Bitcoin, familiarize yourself with different order types, as they can help manage potential losses. For instance, using stop-limit orders while trading derivatives can effectively curtail losses if the price moves against your prediction.
What Are the Risks of Shorting Bitcoin?
- Unlike buying a cryptocurrency, where your maximum loss is the amount you invested, shorting has unlimited potential losses. If the price of Bitcoin rises after you short it, your losses can mount rapidly without a predefined limit.
- Shorting often involves borrowing assets (like Bitcoin) on margin. If the price of Bitcoin rises sharply, you may receive a margin call from your broker, requiring you to deposit additional funds to cover potential losses or risk having your position liquidated.
- While setting a stop-loss order can help mitigate losses, it's not foolproof. During extreme market volatility, stop-loss orders may not execute at your specified price, potentially resulting in larger-than-expected losses.
- Short selling involves borrowing assets from a broker or exchange. If the platform you're using goes bankrupt or faces operational issues, retrieving your borrowed Bitcoin could become difficult or impossible.
- The overall trend in cryptocurrencies, historically, has been upward. Shorting goes against this trend, making it riskier than going long, where you profit from rising prices.
- Successful shorting requires precise timing and thorough market analysis. Failing to accurately predict price movements can lead to significant losses, especially in the volatile cryptocurrency market.
BOTTOM LINE
Short selling Bitcoin involves using strategies like margin trading, futures market, binary options trading, short-selling BTC assets, and BTC CFDs. While you may earn profits if the price falls, be prepared to face losses if the trend moves in the other direction.
Frequently Asked Questions
Is there a short ETF for Bitcoin?
Yes, The ProShares Short Bitcoin Strategy ETF (BITI) was developed to provide a way to profit from declines in the price of digital assets.
Can you make money short selling Bitcoin?
Yes, you can make money by short-selling Bitcoin. However, research and learning are essential before you enter the Bitcoin (BTC) market.
- Exclusive Crypto Airdrops
- Altcoin of the Week
- Insider Interviews
- News & Show Highlights
- Completely FREE
About Ishan Jain
Ishan Jain is a technical enthusiast with a knack for financial analytics and trading. Ishan primarily works on AI algorithms, business development, and software engineering for his ventures and side projects, and he produces Web3 content for Benzinga. Ishan has been involved in DeFi in a variety of ways, including heading a project at a crypto asset investment firm along with leading a blockchain security research project.