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How to Short Bitcoin
You know what short selling is, and you know that you can short sell crypto. The next big question to answer is how to short Bitcoin. This article will detail 7 ways for how to short Bitcoin easily.
7 Ways to Short Sell Bitcoin
There are many different ways to short-sell Bitcoin. The methods vary widely in how much risk they bring, and how much profit you can make from using them. Here are a few of your options.
1. Futures Market
A Bitcoin future is an agreement to purchase Bitcoin in the future at an agreed price. You can be the seller or the buyer in a futures contract. As the seller, you sell a Bitcoin future to another trader. That means you agree to sell an agreed amount of Bitcoin at an agreed price to whoever is holding that Bitcoin future when it expires.
When the contract expires, if the market price of Bitcoin is lower than the price in the agreement, you profit by buying Bitcoin at the (lower) market price and selling it to the future holder at the (higher) agreed price.
If the market price goes the other way, you have to buy at the higher market price and sell to the contract holder at the lower agreed price so you make a loss.
Bitcoin futures are available to trade on traditional financial markets through a few stockbrokers who offer the service. Several cryptocurrency exchanges also offer futures trading.
2. Margin Trading
Short selling Bitcoin using margin trading means borrowing Bitcoin against some deposited collateral, then selling that Bitcoin at the market price. If the price goes down, you can buy back the Bitcoin at a lower price and return it to the lender. The difference in the selling and buying prices is profit. If the price goes up, you will have to pay that higher price, whatever it is, to re-buy the Bitcoin and return it to the lender.
As long as you have a margin trade open, you also pay margin interest payments on the borrowed Bitcoin. These payments can add up to quite a large amount over time.
Margin trading can multiply your profits from short-selling Bitcoin. Unfortunately, any losses you make are multiplied in the same way. This multiplication of profit and loss in margin trading is called leverage. Always remember that, with the unlimited potential losses from short-selling Bitcoin, leveraged short selling can quickly wipe out your collateral if there is a large increase in the price of Bitcoin.
Many cryptocurrency exchanges offer margin trading on their platforms.
3. Predictions Market
Prediction markets are platforms on which people make wagers on specific events. You can think of a prediction market as similar to a sports betting operation.
In a crypto prediction market, you can place a wager on the price of Bitcoin falling or rising to a specific level after some length of time. If you win the bet, you receive a payout from the trader you bet against. Otherwise, you have to pay them. You can short Bitcoin by placing a bet in a prediction market that the price will be lower in the future by some percentage than it is currently
4. Binary Options Trading
A put option on Bitcoin gives you the choice to sell Bitcoin in the future at an agreed price. You have to pay a once-off fee (called the premium) to set up a put. When the put expires, you can choose whether to exercise it. If the market price is lower than the agreed price you can profit by buying Bitcoin then selling it to the holder of your put. If the market price is unfavorable, you can allow the put to expire, and you only lose the premium you paid to set it up.
Bitcoin options trading is mainly offered on crypto exchange trading platforms.
5. Inverse Exchange-Traded Products
Exchange-traded products (ETPs) are derivatives linked to the price of a group of underlying assets. If the derivative is ‘long’ of those assets, it is a traditional (ETP).
An inverse ETP is similar, except short a group of assets. By purchasing a Bitcoin inverse ETP you share the profits generated by a short position on Bitcoin with other traders who have purchased that inverse ETP.
6. Short-Selling Bitcoin Assets
As a holder of Bitcoin, if you think the price will go down, you sell at the current price, then buy it back after the price has dropped, making a profit. Since the Bitcoin is not ‘borrowed’ you are never forced to re-buy it to return to a lender. There are no margin payments to be made. This means you can hold your short position for as long as you want at no cost. However, you must have enough money to buy and own the Bitcoin yourself.
7. Using Bitcoin CFDs
A contract for difference (CFD) is another type of wager on the price change of an asset. Rather than buying or selling, you enter into an agreement that after a specific date you will compare the market price of Bitcoin with the price in the CFD.
If the price is higher, you pay the other person the difference. If the price is lower, the other person pays the difference to you.
Advice for Short Selling
It is just as important to ask when, or whether to short Bitcoin as it is to ask how to short Bitcoin. Below are a few ideas to keep in mind when shorting Bitcoin.
As the biggest cryptocurrency, it is unlikely that Bitcoin’s price will drop close to zero for a very long time. Bitcoin is not like less well-known ‘altcoins’ whose value has been known to rise to high levels, then collapse close to zero over a few months. As a short seller of Bitcoin, it is important to understand your main source of profit is Bitcoin’s day-to-day volatility (fast-changing prices), not an expectation of a big, permanent drop in price.
One reason to short Bitcoin is if you believe it is overvalued. Overvalued means everyone trading it thinks it is worth much more than its true value. If Bitcoin is overvalued, the price should theoretically drop to its correct value over time, as more people realize it and sell.
If you believe Bitcoin is overvalued, shorting is a way to profit from that knowledge. Some factors that might cause Bitcoin to be overvalued are the rise of a rival coin, increased regulation in a major market, or a technical problem with the protocol software which is not widely known.
- How to Make Money with Cryptocurrency
- How to Withdraw from Binance
- How to Transfer From Coinbase to Coinbase Pro
- How to Transfer from Coinbase to Binance
- How Does Cryptocurrency Gain Value?
- How to Read Crypto Charts
The question of how to short Bitcoin does not have a simple answer. There are a lot of different ways to short Bitcoin. Whichever way you choose, remember and understand the risks you are taking on. Don’t let yourself be blinded by the potential profit. Always be aware of how much loss you could make from short-selling Bitcoin.