In the past couple of years, no one thought about shorting bitcoin and much less, how to short bitcoin. In the present time, investors can short sell bitcoin just like any other asset. If you have been wondering how you can benefit from this style of investment, in this guide you will learn everything about shorting bitcoin.
Simple Process of Short Selling Bitcoin
- Study the market trend of the asset
- Be sure price is going to fall so you don’t lose money
- Chose a trading agency
- Study the regulations guiding their services
- Indicate your interest to short sell
- Do not stake so much money to avoid huge loss
Shorting bitcoin is another way of investing in bitcoin where an investor borrows some amount of bitcoin at a current price and sells at the same price, with an anticipation of a future fall in the price which will enable him to pay back at a lower price.
As the price falls, the investor will purchase bitcoin at the fallen price to pay back the borrowed bitcoin and make gains from the drop in price.
This can be illustrated this way; A approached B who is a broker to borrow 5 bitcoin to short sell, when the price of bitcoin is $4000, this means A now has $20,000 worth of BTC, which he sells at the same price. But by the following day, the price has dropped to $3000, A now buys 5 bitcoin at $15,000 instead of $20,000 to pay B pack. Now A has made a profit of $5000 from the price drop of BTC, this is called short selling.
How to Short Bitcoin – Step by Step Process
The first step you need to take to short sell bitcoin is to contact a trading agency or other platforms that provide such service and place a short sell order. Examples of online platforms that provide short sell services are eToro, AvaTrade or Plus500. You can visit any of their websites, to benefit from this service.
Steps to Short Sell on eToro.com
Sign on and go to the trading instrument, BTC/USD, wait for a signal
Enter trade and input the amount you want to sell, monitor and close the trade
The trading agency would sell in anticipation of a rise in price, but this can work both ways. If the price rises, paying back the bitcoin will be more expensive, but the agency will make money. If the price falls, you will make money instead of the trading agency.
Before you opt for short selling bitcoin, it is important that your study and understand the market very well, to know when it is favorable to short sell. The trading platform that loans out the bitcoin may call back the assets at any time with short notice, even before there is any chance for the price to rise. So it is only wise that you understand the rules and regulations covering this kind of service.
The digital asset market is very volatile, this makes prices to change very fast, you can be at risk and loss money if the price rises instead of falling or the lender recalls the asset before price falls.
Methods of shorting Bitcoin
There are different ways individuals and institutional investors can short sell bitcoin, this can be done internally using already owned digital assets or externally through trading platforms and brokers.
Direct Short Selling of Owned Asset
Pros: simple and less risky
Cons: Limited amount of bitcoin to short, low level of profit
You can decide to sell off your already existing digital asset at your discretion, maybe in anticipation of a future fall in price. This is the simplest and less risky way of shorting bitcoin, you hope that the value of your asset would soon appreciate, if you sell, you will be able to buy more BTC when the price falls.
Margin Trading of Bitcoin
Pros: can start without owning any bitcoin
Cons: leverage could reduce profit
This is a method that allows investors to sell bitcoin they don’t own, this can be done on a margin trading platform that allows this kind of trading in cryptocurrency.
This platform allows investors to borrow some BTC from a broker to make a trade, with the hope that price will fall and he makes gains. This is the best way to start short sell, but it is also important to know that the leverage could increase or reduce your profit.
If you want to start, several exchange platforms allow margin trading, some of them are, BitMex, AvaTrade, and Plus500. There may still be other ones but these are about the most popular ones.
Short Selling on Future Markets
Pros: offers investors the opportunity to buy bitcoin below market price when the contract expires
Cons: scarce, not available in so many exchanges
Every Investment instrument has a future market, just as bitcoin also has, this platform allows a future trade which enables a buyer to agree to buy bitcoin at a future date at a fixed price. The buyer purchases this contract with the hope that the price will rise and the buyer will get a deal on the asset. The buyer expects to buy bitcoin below the market price when the contract expires. This may be a good way to short bitcoin, but it is scarce, the only notable exchange that offers this service of buying and selling bitcoin futures is OrderBook.net.
Binary Options Trading
Pros: the set price gains value even as bitcoin price drops
Cons: too advanced and not supported by so many exchanges
This is another way shorting bitcoin, it involves a “put” and “call” options. The put option contract allows you to have a specific amount of bitcoin you have already set at a certain price at a certain time. This means that you hope to sell bitcoin at the present price even if the price drops later. The set price is called the strike price, so the put price gains value even as bitcoin price goes lower than the strike price.
You may decide to sell or keep the bitcoin, with this contract you can buy a certain amount of bitcoin at a fixed price until the contract expires.
This method of short-selling bitcoin is a bit advanced and not recommended for beginners, it is more suitable for those who have experience with options trading. This service is complex and only supported by specialized exchange trading platforms like BitMex.
Shorting Bitcoin on CFD Platforms
Pron: investor doesn’t need to borrow the bitcoin, but can commit a little percentage
Cons: it is not for big investors
The abbreviation CFD means ‘’Contract for Difference” this allows an investor to agree to pay only the difference in price, instead of borrowing the bitcoin, selling and buying back at a lower price. Though CFD functions just like the futures contracts, it is basically for retail investors.
A retail investor who has an account with a broker who does not support bitcoin futures contract can short bitcoin using any online CFD brokers like, eToro, AvaTrade, or Plu500. This method of shorting allows an investor to bet on bitcoin increase or decrease without owning it.
Investors can go on margin to short bitcoin, this implies that an investor is only obligated to put down a certain percentage of the trade amount to open a position, as a commitment. Investors can earn substantially from this method if all things go according to plan, there is also a possibility of great loss should the calculation fail and price falls instead of rising.
Shorting Bitcoin Tracker Fund
Pros: exchange-traded notes are available to institutional investors
Cons: it is not as effective as other methods
Investors can short bitcoin using exchange-traded notes, this option is also available to institutional investors. These notes come in two currencies, EUR or USD denomination, bitcoin Exchange-Traded Notes, which could be found on platforms like Stockholm-based Nasdaq OMX exchange. This method can only be available to US-based accredited or institutional investors who can short the Bitcoin Investment Trust (GBTC).
This method of shorting is not as effective as others like the future and CFD because bitcoin tracker funds trade at a premium to bitcoin.
Other Tips to Keep in Mind
- When you want to start investing in bitcoin, via short selling you need to take time to study and understand the market trends, trading rules, and regulations
- There is likely to be a short squeeze, this is a market situation where some inexperienced or fearful traders fight to close their shorts by buying back the bitcoin they sold, due to price movement.
- It can become riskier trading against a long-term trend which could create more losses as the trading period is extended.
- The price trend is very significant in bitcoin shorting because of the market volatility
- There is no limit to the level of profit for a buyer, but the profit limit for short on bitcoin price is 0.
- Sometimes it may be tough to short when the price trend is high, because the movement may be too fast.
- Shorting Bitcoin is a high-risk venture because it is different from direct buying. When you invest in bitcoin the normal way, if there is a loss, you will only lose the amount of bitcoin you invested. In short, it is different, you can lose more than your initial investment.
- To avoid this huge risk, only invest in bitcoin by short selling, if you have studied and understood the market trend very well to ensure the price will drop.
- Monitoring prices closely is a way to avoid huge loss, you can cut your loss immediately prices start rising.
Though risky, shorting is a great way of earning from investment in bitcoin. Smart investors have recorded huge profits, others have also recorded huge losses, but if it is monitored closely, things can work out well.
It is not advisable for newbies, so if you are looking to invest in bitcoin by short selling, start by borrowing bitcoin, selling when the price is high and buying back when it is low. Ensure to keep up to date with price trends so you can predict well.
Here are some frequently asked questions
What is the best way to short bitcoin?
Start with an accredited exchange, trading agency or broker, register an account and indicate an interest to short sell. Ensure to study the regulations carefully.
Will I lose my money?
Yes, you will if you don’t calculate well, you need to understand the market very well to predict right. If the price doesn’t fall, you will lose money.
Which is the best method to short sell bitcoin?
There are several methods, as we already mentioned, chose the one that is most appropriate for you.
How long does it take to short bitcoin?
It can take a couple of days, depending on when the broker decides to recall his loaned bitcoin.
Yes, you can short Bitcoin on Coinbase. In 2017 Coinbase added margin trading to the platform. Traders can leverage with 3X orders on BTC, LTC, and ETH, which means that users can borrow money from the brokers to buy and/or sell more stocks than they can afford.