In the world of crypto investment, whenever you buy an asset and predict that its value will rise in the future, it is said to be going long on it. But what if the prices are expected to fall?
This is where the concept of short selling comes into play. In this article, we’ll debunk everything from what is short selling and how to short Bitcoin, and as a bonus question, we’ll show you how to short Bitcoin on Coinbase. So let’s get started.
What Is Shorting?
Short selling (also known as 'shorting') is a financial strategy that allows you to make money from a drop in the price of an asset. The objective of shorting Bitcoin is to sell the cryptocurrency at a high price and then repurchase it at a much lower price.
Having this said, it is also important to consider the risks that are related to shorting Bitcoin. Let us look at an example of how to short Bitcoin:
- Suppose you short sell 12 BTC when they were priced at $3,000
- So, you borrowed 12 BTC and sold them for $36,000
- Now the price of Bitcoin drop to $2,000
- So now you repurchase 12 BTC at $2,000*12 = $24,000 (plus any interest) and return it to the broker that you borrowed from
- Thus, you’ve made a total profit (difference between the selling and buying price) of $36,000-$24,000 = $12,000
Now that we know what Bitcoin shorting is, the next big question is how to short Bitcoin. But in order to answer this question, it is necessary to understand the factors that affect Bitcoin shorting.
Factors Affecting Bitcoin Shorting
As mentioned earlier, shorting Bitcoin comes with its own risks. So here are some factors that you should consider while shorting Bitcoin:
Volatility Of Bitcoin
Most of the ways to short Bitcoin rely on derivatives and these derivatives are dependent on Bitcoin pricing. This means that variations in the cryptocurrency's price have a direct relation with your gains and losses. Bitcoin futures, for instance, replicate spot price swings, implying that they cannot be utilized as an effective hedge against investment in actual Bitcoin. In the same way, due to the volatility of Bitcoin’s price, options trading in Bitcoin can increase your losses.
Regulatory Issues
Bitcoin's regulatory position across regions is still unknown, despite its claim to universal coverage. Due to the lack of regulatory monitoring, there are a number of exchanges that have been able to get away with offers that would not be permitted if there was such regulation in place.
Order Types
Having knowledge of the different types of orders can help you reduce your losses if the price does not move in the way you predicted.
How To Short Bitcoin
Now coming to the most important question– How to short Bitcoin? Let’s look at seven ways in which you can short Bitcoin.
1. Binary Options Trading
You can short Bitcoin using both call and out options. In the case of binary options trading, you’ll have to place your order through an escrow provider. This indicates that you want to be able to sell the currency at today's price even if the price declines later. A lot of overseas markets offer binary options, but it costs a lot, plus the risks are also higher.
2. Bitcoin CFDs
CFD is short for "Contract for Difference." This is a financial strategy where instead of borrowing Bitcoins, selling them, and then purchasing them back at a reduced price, you agree to pay the difference. As a result, if the price of a CFD falls, you will be compensated for the difference without having to go through the inconveniences of purchasing and selling coins.
In the case of Bitcoin CFDs, it is not really necessary to deliver the actual Bitcoins. Thus, you won’t have to pay custody fees.
3. Futures Market
Exchange-traded derivatives contracts that lock in the delivery of a Bitcoin, at a certain price in the future are called futures markets.
- When you purchase a futures contract, you are betting that the price of the asset will increase, ensuring that you will be able to obtain a good deal on it later.
- If you sell a futures contract, it indicates that the price of Bitcoin would fall. In this sense, you can short Bitcoin by purchasing contracts that bet on the cryptocurrency's price dropping.
4. Inverse Exchange-Traded Products
Inverse Exchange-Traded Products are similar to futures contracts in that they generate returns by combining them with other derivatives.
BetaPro Bitcoin Inverse ETF (BITI.TO) and 21Shares Short Bitcoin ETP are two exchange-traded products that you may use to speculate on a Bitcoin market drop. But unfortunately, both items are not available to citizens of the United States.
5. Margin Trading
A cryptocurrency margin trading platform is one of the simplest methods to short Bitcoin. This sort of trading is authorized by many exchanges and brokerages, with margin trades allowing investors to "borrow" money from a broker in order to execute a transaction.
Having this said, it is essential to understand that margin comprises leverage or borrowed money. This may, in return, boost your earnings or worsen losses.
6. Prediction Market
Another option for shorting Bitcoin is to engage in prediction markets. Prediction markets in cryptocurrency are comparable to those in traditional markets.
In the case of shorting Bitcoin in the prediction market, investors can set up an event and place a bet based on the result. You may, for instance, forecast that Bitcoin would fall by a specific margin or percentage, and if someone takes you up on the bet, you'll benefit if it occurs.
7. Short-Selling Bitcoin
The short-selling Bitcoin approach may not be for everyone, but individuals who wish for it can profit if their gamble against Bitcoin price pays out. First, you must sell tokens at a price you're comfortable with, and then wait for the price to drop before buying them again.
It is risky because if the price does not shift as you anticipate, you risk losing money or losing Bitcoin holdings.
Bonus Question: How To Short Bitcoin On Coinbase
One of the most famous exchanges in the world– Coinbase, can be used to short Bitcoin. Although margin trading is still not allowed on Coinbase, you can short Bitcoin on Coinbase. Let’s learn how:
You can use futures contracts to begin short-selling without using leverage.
- Create an account on Coinbase.
- Look for a downward trend of Bitcoin
- Enter your trade.
The Bottom Line
Shorting Bitcoin may be a profitable trading strategy. Experienced traders may profit from the turbulent digital currency market if they use the right approaches. Prices are continually rising and dropping as a result of increased government regulations, such as IRS, and the emergence of new tokens.
It is recommended that you only invest the amount that you can afford to lose. Also, keep up with current trends in the crypto industry so you can predict price changes of Bitcoin or the coin you’re shorting.
Disclaimer: Nothing mentioned above is financial advice, consult a financial professional before making any investments.
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