How to Short Bitcoin: A Beginners Guide To Shorting BTC
Short trading is a strategy that allows advanced traders to make a profit by exploiting the difference in price of a single asset and betting against its price movements. Its high-risk, high-reward nature attracts a lot of crypto traders, leaving many wondering whether its possible to short-trade crypto. In this article, I will talk about how to short Bitcoin and look at the common risks any future BTC short-sellers should keep in mind.
What Is Shorting, And Does It Work With Crypto?
Short-selling is a trading practice that lets you benefit from a drop in an assets price. To put it simply, it involves selling an asset you dont own and then buying it back later. It goes like this:
- You borrow an asset.
- You sell it.
- You repurchase it when the price drops.
Shorting in the context of cryptocurrency refers to betting against the value of a particular cryptocurrency. This is done by borrowing the cryptocurrency from someone else, selling it at the current market price, and hoping to buy it back at a lower price later to repay the loan and pocket the difference as profit.
Whats the difference between long- and short-selling Bitcoin and other cryptocurrencies? Shorting in crypto means the same thing it does in traditional trading: you sell Bitcoin you dont own and buy it back later at a lower price.
Imagine a scenario in which you think that Bitcoin price is going to drop soon, either because youve done your own research or have read somebody elses (remember to never blindly follow other peoples financial advice!). To profit from this knowledge, you borrow 1 BTC from an exchange and sell it for $60,000. A week later, just as you predicted, Bitcoin drops to $40,000 and you promptly buy back that 1 BTC you borrowed, thus getting $20,000 of profit.
How To Short Bitcoin: Top 5 Ways To Short BTC
Well, now youre probably wondering: how do you short Bitcoin? Dont worry, its really easy! Although at first glance it may seem that shorting crypto is not as straightforward of a process as shorting shares, its quite similar. But before we go into the ways of how to short Bitcoin, lets start with the platforms where you will actually be doing all the crypto trading.
Where to Short Crypto?
As crypto became more popular, a wide variety of trading platforms fit for every kind of user emerged. If youre looking for a reliable cryptocurrency exchange that provides users with the ability to short-sell BTC, you dont have to look far: the feature is available on many reputable exchanges, such as Kraken, Binance, and Bitfinex.
Now, lets move on to the next step: actual short-selling. How you short Bitcoin will depend on several factors, including but not limited to your risk aversion, available funds, level of expertise, and so on. Here are the 5 main ways in which you can short cryptocurrency.
Margin Trading
This is one of the easiest ways to short Bitcoin.
Margin trading also allows you to use leverage, meaning you can borrow more money from the exchange than you have deposited in your account. While this opens up doors for higher profits, it is naturally riskier, too your position may close sooner than you expected if youre engaging in leveraged shorting.
Learn more about margin trading in our ultimate guide: Margin Trading on Changelly PRO.
Futures Market
Just like other assets, Bitcoin has a futures market. In a futures trade, you basically agree to buy an asset in our case, BTC on the condition that it will be sold later at a predetermined price. This agreement is called a futures contract.
However, it is also possible to sell futures contracts. In that case, unlike when buying them, you will be able to benefit from the assets price dropping.
Read more about the Bitcoin futures market here.
Binary Options Trading
Binary options trading allows you to bet on yes or no scenarios. This financial product provides buyers with the option but not the obligation to complete the deal. You basically bet on whether an assets price will go up or down. To short sell crypto using this method, purchase put options.
Binary options trading offers great flexibility and higher-than-usual leverage. We would advise against engaging in it unless youre an expert trader.
Prediction Markets
Prediction markets are somewhat similar to sports betting agencies. Such platforms havent been around in the crypto industry for a long time, yet they present a good way to short Bitcoin. They allow you to make a wager on a specific outcome, such as Bitcoin is going to fall by 10% next week. If somebody takes you up on the bet, you can make quite a hefty profit.
Short Selling Bitcoin Assets
If you have enough of your own funds, you can also short sell Bitcoin directly. All you need to do is sell BTC when the price is high and then buy back when its low. This method of short selling Bitcoin is relatively beginner-friendly, as you dont need to learn how to use trading platforms to utilize it. It is also a lot less risky since you cant lose more than you own. On the other hand, it is less profitable. As always, the higher the risk, the higher the reward.
The Risks of Shorting Bitcoin. Things to Watch out for While Shorting Crypto
If everything goes according to plan, then you will be able to buy back the assets you borrowed at a lower price and secure a substantial profit. Unfortunately, things rarely go as we expect them to especially in the crypto market, which is highly unpredictable and subject to constant price movements. The advanced trading strategy of short selling embodies this unpredictability, offering the chance for significant returns but also posing the risk of considerable losses.
The most significant risk of shorting, especially when utilizing options contracts or contracts for difference (CFDs) on crypto exchanges, is that there is technically no cap on the potential losses you can incur. When you short Bitcoin or any other cryptocurrency, you effectively open a position. Normally, you can decide when to close this position (buy back the asset you borrowed) on your own terms. However, situations arise, such as a margin call, where your broker or the exchange may automatically settle the position using the funds in your account, based on the current price of the asset.
Nevertheless, there are instances when automatic buyback is not feasiblethe market might be closed, or the demand for the asset may significantly exceed its supply. In these cases, the buyback price could surpass your account balance, potentially leaving you indebted to the exchange. Such scenarios, while rare, underline the importance of employing sound risk management strategies, including technical analysis and vigilant market monitoring, to mitigate the risks associated with these advanced trading strategies. Always proceed with caution and keep a close eye on the market and the price movements of the asset you intend to purchase.
Conclusion: Can You Short Sell Bitcoin?
Short selling Bitcoin can be a profitable way to capitalize on cryptocurrency price movements if you have a solid grasp of market analysis. Along with the methods mentioned, there are other approaches to short Bitcoin, such as spread betting or trading Contracts for Difference (CFDs). However, if youre not an experienced trader yet, it could be a good idea to start with more traditional investment methods first.
When short-selling Bitcoin, its important to do thorough research and align your investment strategy with your risk tolerance and investment objectives, ensuring you only use funds youre prepared to potentially lose. Cryptocurrency markets, much like the stock market, can fluctuate greatly, leading to a significant price difference between the opening and closing of positions, potentially resulting in substantial losses. Crypto traders must be mindful of the volatile nature of crypto assets and consider setting aside additional funds as a buffer against unexpected market movements.
FAQ
Do you lose money if Bitcoin goes down when short-selling BTC?
No, because of the nature of shorting, you will actually make a profit if Bitcoins price drops.
Is short selling unethical?
To a non-trader, short selling may seem unethical and even downright evil after all, youre basically betting on a business or an underlying asset doing badly. Since so many people are passionate about Bitcoin as a technology, they may see betting against the cryptocurrencys success as something negative.
However, this couldnt be further from the truth. Short sellers, to a certain extent, are very beneficial to any market. In addition to providing liquidity, they also prevent asset prices from inflating too much. Of course, some unethical short sellers use strategies like short and distort, but its not that different from people who use pump-and-dump schemes in traditional trading. At the end of the day, its not the activity itself thats unethical its the (few and far between) people who indulge in unethical practices.
In addition to what Ive already said, short sellers can also help expose financial fraud since one has to do a lot of research to short sell successfully. So, short sellers usually notice mistakes, inflated numbers, etc. in financial reports.
What happens if a short seller defaults?
In most cases, that will never happen your position will be closed once the price of an asset goes up and a margin call is issued. However, if the price rises significantly while the markets are closed, and the loss you incur cant be covered by your account balance, the exchange/broker will have to chip in and assist you with closing your position. They can sue you afterward to get that money back.
Is there a way to short Dogecoin?
Yes, you can short any cryptocurrency, including Dogecoin, Ethereum, and many others. It all depends on what trading pairs are available on your exchange of choice.
Is short selling bad?
The act of short selling crypto is a risky maneuver. Whether or not it is bad depends on the individuals approach. If a person fully understands the implications of short selling crypto and takes precautions to protect themselves from losses, then they can benefit greatly from the quick potential appreciation in crypto prices. However, if a person does not grasp associated risks or fails to safeguard their investments, then short selling could lead to disastrous outcomes.
How do you know if a stock is being shorted?
To learn whether the stock is being shorted, examine its long/short ratio. This is also a great way to look out for short squeezes a situation where the number of short positions for an asset significantly prevails. It is usually a harbinger of price spikes.
Can you hold a short position forever?
Well, yes. However, in reality, no short position is held forever.
Your position can be closed for two reasons: either you close it yourself when the market price of the asset you borrowed drops enough for you to make the profit you wanted, or it gets closed automatically because the price has risen too far. Of course, technically, the price may remain the same, but its more than highly unlikely. Alternatively, you can lose access to your trading account or forget that you opened a trade.
Disclaimer: Please note that the contents of this article are not financial or investing advice. The information provided in this article is the authors opinion only and should not be considered as offering trading or investing recommendations. We do not make any warranties about the completeness, reliability and accuracy of this information. The cryptocurrency market suffers from high volatility and occasional arbitrary movements. Any investor, trader, or regular crypto users should research multiple viewpoints and be familiar with all local regulations before committing to an investment.
The post How to Short Bitcoin: A Beginners Guide To Shorting BTC appeared first on Cryptocurrency News & Trading Tips Crypto Blog by Changelly.
Read more: https://changelly.com/blog/how-to-short-bitcoin/
Text source: Cryptocurrency News & Trading Tips – Crypto Blog b
