Learning how to short Bitcoin (BTC) is an essential skill to learn if you intend to become a professional crypto trader. Notably, shorting is an advanced investment strategy that comes with a high level of risk. However, if you master the skill, you gain the ability to acquire massive returns during times of market value decline. In the following text you will understand what it is and how to short Bitcoin.
What Does Shorting Mean in Crypto?
Short selling is an investment method that allows you to benefit from drops in the price of a particular asset. When an investor speculates on the decline in a tradable asset such as Bitcoin, stocks, or other securities prices, they can gain profits using shorts. In a short sale scenario, you bet against the price of the asset in question.
How Does a Short Work?
To understand shorting, let’s first look at the industry that created this method – stocks. In the stock market, short selling is a popular investment strategy. To accomplish a short, an investor borrows a certain amount of the stock they believe will decline in value. As soon as the investor receives these stocks, they sell them at the current market value. Once the price of the assets drops, the investor then can buy the stocks back and return it to the lender.
While the asset is different, shorting Bitcoin works in much the same manner. A crypto trader will borrow Bitcoin prior to a foreseen market drop. As soon as the investor receives their Bitcoin, the assets are sold. After the value of Bitcoin completes its dip, the investor repurchases Bitcoin with the original sales funds.
Because the price of Bitcoin is cheaper than when you borrowed it, you can repay your loan and keep the difference in the repayment and your total trading actions. Here is a specific example of shorting in action.
- You short sell 10 Bitcoins when the price is $4,000
- This means you borrow 10 Bitcoins and sell them for $40,000
- Price of Bitcoin drops to $3,500
- You repurchase 10 Bitcoins to give back to the agency you borrowed from at 10*$3,500 = $35,000
- Your total profit is $40,000-$35,000 = $5,000
How to Short Bitcoin?
To short Bitcoins, you need to contact a trading agency or platform and place a short sell order. The agency will then sell the Bitcoins from their own supply, based on the assumption that in the future you will repay them with an equal number of Bitcoins. If you short sell 10 Bitcoins, for example, you will eventually have to “cover” those 10 Bitcoins, whether prices rise or drop. If prices drop, it will be cheaper to buy these 10 Bitcoins back. However, if prices rise, it will be more expensive.
When short-selling, the firm or individual who loaned the Bitcoins to you, can generally recall the assets at any given time and are required to give you only a short notice. So make sure you read any rules, regulations, or guidelines for “covering” any assets you short sell. With markets fluctuating at such a rapid rate, costs can swing wildly, putting you at risk. Short selling can be especially risky if the lender calls in the assets before prices have a chance to drop. Short selling is actually very common with stocks and most major trading platforms allow you to short stocks. There are a variety of ways to short Bitcoin:
Short Sell CFDs
One of the most popular ways to short Bitcoin is through the use of CFDs (Contract for Difference). CFDs allow you to short Bitcoin without purchasing any coins directly. Instead, you sign a CFD and agree to just pay the difference between the price of the asset at the time of your loan and your contract rate. CFDs are popular because they are more convenient and cost-efficient because there is no need to make additional purchases.
How to Short CFDs?
eToro is the premier exchange for cryptocurrency CFD trading services. You will need to create an account to get started. Luckily, the process is simple. Notably, you must verify your identity and account via an email before you can use the platform.
Once you are all set up, shorting is simple. All you need to do is open a trade on the BTC/USD instrument. Next, you need to select “Sell” from the options. You will be brought to a screen that will allow you to set up all of the details of your CFD. It doesn’t get easier than that. Best of all, eToro features an advanced interface that is easy to navigate. Form here, you can stay up-to-date on all the market’s developments.
Warning: Please be aware that all trading involves risk. 67% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you can afford to take the high risk of losing your money. This content is for educational purposes only and is not investment advice.
Bitcoin exchanges geared towards crypto traders offer short selling options, and some allow for leveraged shorting too. Leveraged shorting means you can borrow more money from the exchange than you actually own there, in order to buy the Bitcoins you want to short. For example, say you have $1,000 on the exchange and you leverage on a 1:3 ratio you can now short sell up to $3,000 (3 times of what you have).
Leveraging is considered very risky since if things don’t go as you intended, the exchange will close your trade sooner than you expected (because they know you’re using money you don’t really own). In other words, leveraging magnifies both gains and losses. Major exchanges that allow you to short sell Bitcoin include: Bitmex, Bitfinex and Kraken.
When Should You Short Sell?
There are certain times when shorting Bitcoin is more complicated than others. For example, shorting Bitcoin against long-term uptrends can be tricky, to say the least. Bitcoin has a way to slowly rise in value. Reversely, this digital asset can shed thousands of dollars in market value in minutes. These scenarios put into perspective why shorting can be difficult for new investors to complete successfully.
It’s also important to consider the mentality of other traders in the market. If you short Bitcoin, and suddenly the price starts to shoot up quickly, you will need to rush to repurchase your assets. Unfortunately, every other investor who made the same decision will seek to accomplish the same task.
This sudden drive to repurchase Bitcoin drives the market value up sharply. When this scenario plays out, it’s what is known as a short squeeze. Short squeezes add to your losses in this position. To avoid this scenario, you must be vigilant in your market assessments.
Risks of Shorting Bitcoin
I should warn you that short-selling any asset is a high-risk venture. Normally, when you invest in an asset your losses are limited to the amount of money you have invested in that asset. For example, if you invest $10,000 dollars in a stock, and that stock suddenly collapses and becomes worthless, your losses will be limited to the $10,000 dollars you invested.
When short selling, however, your losses could extend far beyond your initial investment, something that is very important to consider, especially with Bitcoin. The easiest way to explain this is to use an example: Let’s say you short-sold $100 dollars worth of Bitcoin back when prices were only $10 dollars per coin. That means you short-sold 10 coins. Let’s assume that you have yet to repurchase the coins, meaning that you still have to pay the owner back with 10 Bitcoins. Now let’s assume that all of a sudden prices went up to $4000, which can definitely happen with Bitcoin. This means that the 10 Bitcoins you need to pay back will now cost you $40,000!
As you can see, short-selling any asset can be very risky. If you want to short sell Bitcoins or anything else, you need to be very careful. Only invest if you are very confident that prices will drop, and if you have money to cover your losses if investments rise. Make sure you watch prices closely and cut your losses if prices start to rise too quickly.
Conclusion – Should You Short Bitcoin?
Shorting is a great way to make some extra profits. However, if you are new to trading, or are unfamiliar with the market, shorting is one of the fastest ways to lose your booty. For these reasons, each investor needs to do some soul searching prior to jumping into the shorting market. That being said, shorting is a powerful tool that provides investors with huge ROIs when completed correctly.