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Bitcoin Shorting Guide - Why you should try Short Selling?

Bitcoin Shorting Guide - Why you should try Short Selling? Photo 1

Bitcoin is an extremely volatile currency offering great opportunities for those who want to make money by buying tokens at a low price and then reselling them at a higher one. Thus, by taking advantage of the volatility of digital money, traders can sell bitcoins (BTC) and make a profit. However, believing you can only make money from cryptocurrency when the market is moving up, you are very much mistaken. In fact, you have an opportunity to short Bitcoin and thus make a profit when the price of tokens goes down. When the price of digital money falls, you also have a chance to make money on it. So, if long-term investing is a bit out of your league, you are in the right place. Read this post to find out what Bitcoin shorting is, how it works and how you can make money from it.

What Are Bitcoin Shorts?

The main purpose of shorting BTC (in comparison to longs) is to sell the cryptocurrency at a high price and then buy it at a lower one. To do that, you need to borrow some bitcoins, sell them for fiat money and wait until the cost of the digital assets drops. Once it happens, you can then buy bitcoins with the fiat money you previously obtained and repay the debt in crypto. Your profit will be equal to the difference between the selling and buying price, expressed in fiat money. Even though it sounds easy, in reality shorting BTC (alternative to regular trading for Americans) is a pretty risky venture, because it is hard to predict the consequent value movement. To be successful, you must have the appropriate knowledge and experience, as well as monitor and analyze any events (with information from authoritative sites such as Reddit, Coincentral, Bloomberg, Forbes, New York Times, Coinigy, YouTube and others, f.e.) affecting the cryptocurrency's value.

How Can You Short Crypto - Explaining How It Works by Example

Most traders prefer to buy BTC at a low price in order to resell it later at a higher one. However, while crypto generally shows a positive price trend, there are both ups and downs in its value. In other words, in the short run, the value of tokens can drop, which is where the definition "Short Bitcoin" comes from. Profiting from the falling value of a crypto can mostly be achieved over short distances. Keep in mind, you will need borrowed capital to successfully short a cryptocurrency. So, here is an explanation on how to short Bitcoin by example:

  • You want to open a short position for 5 BTC, DOGE (Dogecoin) or any other crypto (f.e. Tether or USDT, Ether, Omen, Ethereum, Poly or D1, symbol of token based on diamond). Suppose the current exchange rate of BTC is 40,000 USD (United States Dollar) per BTC (price without tax and rounded for simplicity).
  • To buy 5 BTC, you need to pay $200,000. You probably don't have so much money.
  • You can ask your broker to lend you 5 BTC.
  • When you receive the coins from the broker, you sell them immediately (convert them into fiat money), making $200,000 (5*40,000=200,000). Hold on to your money before you complete the bitcoin shorting process.
  • After a short time, your prediction that the value of tokens would fall came true (probably some economic bubble burst), and the current exchange rate of BTC is $30,000 per coin.
  • Now you will buy 5 BTC at $150,000, return the coins to the broker and be left with $50,000 profit in your pocket (available for cashing out).

So, you have performed the opposite of opening a long position. The shorts concept is viable when there is a near-term downside to the value of the crypto. However, shorting a cryptocurrency is an investment that can be much more risky than traditional trading to profit from an increased token value. If there is a rise instead of a fall, you will have to buy higher-priced coins to pay back your broker.

Reasons Why Some Market Participants Engage in Short Selling Bitcoins

Like many other financial tools, BTC allows you to go short and profit from it. It is a complex process, the success of which depends on many factors, including whether you intend to use a leveraged brokerage company or legit cryptocurrency exchange like Bitfinex, Gdax, Bitby, Gbtc, Poloniex, Bitmex, KuCoin, Bittrex, Kraken, Coinbase, Zebpay, Ubet, Luno, Binance, Coinhako, Lossow, Bitstamp, Coinsquare, Gemini, Robinhood, and some others. Many of them play an important role in the development of the crypto market. In any case, the decision to short crypto depends directly on your motives. Overall, there are many reasons why traders use this brief scheme to make money from crypto - check them out below:

  • The overpricing of a digital asset. There are many people who believe the current value of BTC and altcoins does not reflect their real worth. So, being in a price bubble, digital tokens will invariably start to fall in cost in the short or long term. Thus, it makes sense to borrow tokens now when they are near their peak value, and then pay back the lender when the price drops (opening shorts). Traditional traders believe in the rising value of BTC, which is driven by rising demand and falling supply.
  • Hedging, that is, trying to find an equilibrium point for a particular digital asset in order to reduce risk if the price does not go in the desired direction (falling). There are traders who sell crypto to hedge the risk of a larger portfolio. For example, you already have cryptocurrency savings and now there is a risk of the value of the tokens will decline. If that risk holds true, by selling (shorting the cryptocurrency), you will not only compensate the potential loss but also make some profit.
  • Volatility. In the more than 10-year history of crypto, we have seen the value rise and fall dramatically on many occasions. Risk-takers are often attracted to highly volatile assets having a high potential to profit from price differences. However, this is not a place where you can only rely on luck. With experience, knowledge, and a structured approach, you will minimize the risk of losses from shorting BTC.
  • Skepticism towards cryptocurrency in general. In fact, this is often the reason why some experts consider BTC to be a highly overvalued currency.

Whatever the reason why you decide to try shorting cryptocurrency, you should always keep up to date with the latest developments in the cryptocurrency market and not let opinion leaders influence your objectivity.

Where Can You Short Bitcoin?

There are several places where you can short BTC with each having its own advantages, disadvantages, and risks. Below we have listed a few popular shorting crypto options. However, with the exception of traditional exchange trading, most of them are classified as derivatives trading types. In any case, before settling on any of the suggested options, it is worthwhile to read more about them.

Exchanges (Margin Trading Crypto)

There are many crypto exchanges such as Kraken, Etrade, Voyager or Bitmex com that support BTC shorting. However, these platforms are only suitable for opening short positions. Before you do that, you still need to borrow some coins from your broker. Waiting for the price to drop, you can then buy bitcoins on the exchange and return them to the lender. Keep in mind that because the price can go up all the time, the hypothetical loss can be significant (meaning really big losses even if you are a pro trader). The high degree of reliance on liquidity in selling comes from the fact you have to pay a transaction fee along with the interest on borrowing the tokens. Due to the high risk and complexity of selling on the exchange, many traders choose to work with a brokerage company providing leverage.

BTC Futures

Like stocks and bonds, BTCUSD also has a futures market that is rapidly gaining momentum today. Futures are contract-backed products with auto execution on expiry. Having Bitcoin futures effectively means you are entering into a contract with a deferred performance obligation on the digital asset. The contract contains information about the price and the date of the subsequent sale. It makes sense to buy futures if its value is expected to rise over time. Conversely, you should sell futures contracts if their value is likely to fall. So, shorting opportunities arise when there are futures staking on crypto's declining value. Moreover, futures are now superior to spot and stock markets in some respects.

BTC futures started as a market tool in 2017 on the back of the rapid growth of BTC and altcoins. The Chicago CME is one of the best places to trade futures (the Nyse and Cboe are also supporting BTC). In addition, there are many crypto exchanges supporting this option. Another option to buy Bitcoin futures is dealing with brokerage companies.

Binary Options

There are several offshore exchanges like TD Ameritrade (USA), Deribit, and OKEx that support call and puts options (SPY, SPX). To short crypto, you need to open a put order. An escrow service may be required. In fact, using this option, you will try to sell the digital assets at today's value, even if the value falls. The main advantage here is that your potential losses are limited to your investment in put options.

BTC CFD

Operating in much the same way as futures, a CFD is a strategy whereby you profit on the difference between the opening and closing price. So, by investing in a CFD that predicts a decline in the value of digital money, you are actually betting on it (shorting crypto). The key difference between CFDs and futures (BTC ETF) is the latter are contracts with a limited duration (will close when it expires), while CFDs are more flexible in terms of duration. Some CFDs are based on the performance of BTC as well as its performance relative to national currencies and other digital assets.

Sell-Shorting Assets

With its many costs (using a crypto wallet, transaction fees, etc.) and high risk, this strategy is not a cure-all. You just have to sell tokens you already have and wait for the price to drop to buy them again. While you can use the leverage offered by brokers and some exchanges, this introduces additional risks of increasing losses. If you are going to do this, make sure the market crash is not this year or month, but literally in a day, two, or three.

Crypto Prediction

There are several crypto prediction platforms like Augur and Polymarket that accept bets on predicting the future price of digital assets. By joining such a platform, you can create an event and accept bets on it from other participants. For the purposes of shorting BTC, you can predict a certain percentage of the token's decline in value. If someone accepts your bet, in case your prediction comes true, you will make a profit. However, given the highly volatile nature of Bitcoin and the specifics of this strategy, it is something akin to gambling in terms of risk.

How to Short Bitcoin – Step-by-Step Tutorial

Since Bitcoin is one of the most valuable currencies in the world with 1 BTC equal to about $40,000 (at the time of writing this post), you are unlikely to have enough capital to buy multiple tokens. Therefore, we suggest the option of shorting using the leverage provided by a brokerage company or exchange. Keep in mind, you need to be aware of the peculiarities of the bitcoin market, leveraged trading, and cryptocurrency shorting. If you are a beginner, it makes sense to start by trading with a demo account before you switch to real trading. So, here are some steps to consider before you start shorting crypto:

  • Analyze the cryptocurrency market for better gains. By reviewing crypto price history and using technical indicators, you will gain a better understanding of the market and be able to find entry and exit points. With all the data (from news and some credible sources), you will also be able to make predictions with a certain degree of accuracy.
  • Open a trading account. Analyze the options described above and choose the one that suits you best. Contact the platform's support team to find out more about its features.
  • Work on minimizing your risks (but there is no way to turn off the risk). With take profit and stop loss orders tricks and tips, you can optimize your trading activity and avoid most of the common mistakes. Also, read the crypto tickers.
  • Open short positions, borrow BTC when the price is high (sales of existing tokens are possible), exchange it to fiat money or digital tokens, buy crypto when its price has dropped, calculate your profit.

By using strategies based on technical or fundamental analysis, you structure your trading to perfume it more safely and optimize your risks.

Things to Consider When Shorting Cryptocurrencies (Bitcoin Shorts)

Bitcoin is a new kind of money operating on a distributed ledger. Because BTC is unregulated, there are many factors affecting its value, resulting in high volatility (the price can rise and fall sharply over short periods of time). Like any cryptocurrency business, shorting is a very risky venture. To be aware of the risks, here are a few factors you should take into account before you start BTCshorting.

Constant Price Fluctuations Explained

The unstable nature of BTC and altcoins causes frequent price movements up and down. The success of shorting BTC is directly dependent on directives, i.e. financial tools with a value dependent on the value of the underlying asset (in this case, the digital asset). Because of the BTC fluctuations, there is a risk of losing invested funds. Although futures were introduced as a tool to protect against fluctuations in the price of the underlying asset, even they cannot protect bitcoin investments reliably. Options trading is also a very risky activity, so you need to take these points into consideration.

Bitcoin Is a Very Risky Asset to Invest In

While conventional money has been around for millennia, BTC has only recently passed the 10-year mark since it was introduced to the world. What's more, crypto operates on the basis of blockchain technology, the principles of which are not widely understood. While one often hears claims like Bitcoin is digital gold, the reality is that investors do not have enough reliable information to make informed investment decisions. While there are several regulated platforms providing a safe and secure crypto trading environment today, history is replete with cases of digital money theft, so low trust is another issue that has not been addressed. So, some big companies like Amazon have yet to launch support for crypto.

Cryptocurrencies Still Not Recognized by Leading Governments

While many large companies have started accepting BTC as a payment method (goods and services purchases), the crypto's regulatory status remains uncertain. Thus, Deribit, FTX and OKEx, and some other leading platforms are still inaccessible to investors from the US and other developed countries. The lack of regulatory oversight opens the door for exchanges to make highly questionable offers to their users, which would be unacceptable if they were regulated. A good example is Binance, an exchange which only recently stopped offering 125% leverage (as well as BTCDOWN leveraged tokens).

Some Other Factors Contributing to the Nature of Cryptocurrency

BTC shorts could be a great option as the number of tokens to be issued is known to be limited. However, bitcoin supply is affected by factors such as halving (a reduction in miners' reward for each new block added) and so-called "dead bitcoins" (over the years a huge number of tokens have been stolen from exchanges and their whereabouts are still unknown). What's more, the losses from the price increase can be unlimited in size, as there is an increase in demand amid a decrease in issuance. However, you can mitigate this factor by using a stop-loss strategy.

Summary

So, shorting crypto is a very risky but potentially lucrative venture. Giving you the opportunity to make high profits, shorting requires minimal start-up capital and allows you to attract investment. However, without proper market research, you run the risk of incurring serious losses. In addition, a starting margin account will be required for earning a margin interest. Refresh your knowledge of different order types, analyze current market conditions, and use stop-limit orders to minimize potential losses.

F.A.Q.

1.

What is shorting BTC mean?

It is selling crypto tokens at the current price when it is certain that their value will decline in the near future. This activity (vs regular trading) is the opposite (inverse) of opening a long position (longs in trading) in anticipation of an increase in the value of digital assets (bear sentiment) to earn profit. 2.

Is cryptocurrency shorting viable?

Although there is every incentive for further growth, crypto is a highly volatile digital asset with a short-term upside and downside potential. Therefore, shorting can be a profitable venture, but all possible risks must be taken into account. 3.

What are the best ways for shorting?

Options and futures are currently the best choices. You can also consider margin trading and price prediction as additional gaining profits options. 4.

Is it a good idea?

Given that you need to borrow tokens, sell as high as possible, and then wait for the perfect moment to buy (with bearish sentiment), this kind of trading activity is extremely risky. On the other hand, you get to make money even when the markets are bleeding. 5.

What is leveraging in Bitcoin shorts?

This is when a brokerage firm or exchange lends you money or assets. The leverage size depends on the risk rate of the asset available for lending. 6.

What are the key risk factors for me as a shorter?

First, digital money is based on technology that is not fully understood by customers and even some crypto nomads, so making informed decisions is difficult. Second, BTC is a highly volatile currency with rapidly changing prices. Third, the regulatory framework for crypto remains unclear (the problem of digital money appreciation).

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