With bitcoin being popular because it’s a great alternative to fiat money, there are many ways in which people are regularly trying to find ways to use it to make a profit.
One of the ways in which you can do this is by shorting bitcoin.
What, exactly, does it mean to short bitcoin?
This is when you sell your bitcoin in the hope that its value will decrease and then you can purchase it again at a lower price, therefore making a profit.
“Shorting” therefore basically means that you’re betting its value will go down. By shorting bitcoin, traders can take advantage of the difference in the market price. Here’s everything you need to know about shorting bitcoin.
- 1 Is Shorting Bitcoin Bad?
- 2 What Are Your Reasons For Doing It?
- 3 What To Know About Shorting Bitcoin
- 4 How To Short Bitcoin
- 5 How To Find The Best Time To Short Bitcoin
- 6 An Example Of How To Go About Shorting Bitcoin
- 7 Related Questions
- 8 Conclusion
Is Shorting Bitcoin Bad?
You might’ve heard talk about how it’s negative to short bitcoin because you’re essentially believing that its value will drop. Others have claimed that shorting bitcoin is an activity reserved for people who don’t trust in it anymore.
But that’s not the whole story. There have been many times when bitcoin’s price dropped, only to increase at a steady pace again. If you couldn’t short bitcoin you’d essentially be unable to hold bitcoin because it was over-priced.
You wouldn’t be able to use it, and you’d be wasting your time with it. By shorting bitcoin, you’re making something for yourself and seeing opportunities where others don’t.
What Are Your Reasons For Doing It?
As with anything, having clear motivations about why you want to do something is important. It’s the same with shorting bitcoin. A good reason to short bitcoin is because you’re aware of the trends and predict that bitcoin value will drop.
This lowers your risk by short-selling it. If the market does indeed fall, you will be able to recover some of the loss to your investment, and have gains on your short position, as IG explains.
To give you an example of how shorting bitcoin would work (via Mitrade), imagine that you predict bitcoin prices will decrease within the next few weeks. You therefore purchase five bitcoins at $5,000 for each coin and have spent a total of $25,000.
The price does drop, let’s say for example that it’s now $4,000 per bitcoin. You can go ahead and sell your bitcoins at the current price, giving you $20,000. Instead of suffering a loss to the value of $5,000, you now have made a profit of $5,000.
What To Know About Shorting Bitcoin
If you’re keen on shorting bitcoin, you’ll need to use a cryptocurrency trading platform in order to place a short sell order. Then, the platform will sell bitcoins from their own stash on your behalf.
You will repay this at a later stage, whether their price rises or falls – see, that’s the risk you take. If the asset price falls, you’ll be able to buy these coins back much easier than if the price increases as that will obviously make the purchase much more expensive.
It’s important to read all the guidelines of the person or company from whom you’re buying coins if you want to short bitcoin.
In order to benefit from the process, you’ll also need to be aware of the markets and have knowledge about Bitcoin while understanding that you’re always taking a big risk with your money.
How To Short Bitcoin
Maybe you’re aware of the risks but still want to short bitcoin. If so, here are some methods in which you can do it.
If you want an easy way to short bitcoin, margin trading could be the method for you. How it works is that investors will borrow a certain amount of bitcoins from a broker when they make a trade and sell it at its market price. Then they wait for the price to drop.
When it does, they will purchase the bitcoins again and make sure to return the same amount to the lender that they initially borrowed.
They hold onto the profit that they gained from when they sold and purchased the coins. One of the pros of margin trading is that it’s useful for intraday traders. The risk?
There’s often a high capital risk involved.
Bitcoin’s futures market is basically when a buyer chooses to purchase an asset with a contract that establishes at what price this asset will be later sold.
This is known as a Futures Trade. So, if you buy Bitcoins in this way, you hold the view that the price of those coins will increase in the future. When the price does follow suit and increase, you will then purchase the bitcoins at a prefixed price.
This is laid out in the futures contract and will be lower than its current market price. So, you’re assured of receiving a profit on the coins in future.
Now, when you sell bitcoins with a futures contract, you assume that their price will drop. When it does, you can then sell the bitcoins at its prefixed rate that’s listed in the contract. In this way, you can earn money by choosing not to sell at the present market price, as Medium explains.
One of the benefits of this method is that you can make a profit even in a bear market and you don’t have to pay commission fees. The downsides?
You need to be an advanced trader and have a lot of market knowledge in order to increase your chances of making a profit.
Binary Options Trading
Binary options makes use of “put” and “call” options. What this means is that with a “put” option, you sell a certain amount of bitcoins and you set them at a certain price and at a certain time. This earns more value as bitcoin loses value.
The important note is that you’re not forced to sell it if you don’t wish to do so, as The Balance explains. Similarly, a “call” option allows you to buy shares in the same way. You can therefore purchase a certain amount of bitcoins at a price until a certain expiration date.
The pros of this method is that binary options are short-term trades, with a fast-paced trading atmosphere. This is exciting, especially for advanced traders. The downsides?
You can make use of binary options via many offshore exchanges but it does come with high risks.
Which Is Better: Margin Trading Or Futures?
While the use of margin trading produces the same effect as when you sell futures, there are some benefits to futures that give it an edge over margin trading. Here are the pros to consider:
- You get higher leverage. The maximum leverage you get with futures can be much higher than that of margin trading. While margin trading is limited to around 5X or less, you can get leverage of up to 100X. In case you don’t know, leverage basically refers to the number the trader’s investment is multiplied by. So, if you hold $500 and then make use of 100X leverage, you could open a $50,000 position, as Medium explains.
- You have more options at your disposal. If you make use of margin trading you’re limited to shorting bitcoin and some other altcoins. If you like the idea of being able to short other coins, you’ll be better off using futures.
How To Find The Best Time To Short Bitcoin
Time is everything when it comes to shorting bitcoin. Do it at the wrong time and you could end up suffering a loss. You therefore need to ensure that the market will experience long price declines, and in order to find out when this will occur you’ll have to do various types of analyses.
An example is to do technical analysis, which is when you look at patterns and triggers in bitcoin price charts. Another type of analysis that will be beneficial to you is fundamental analysis.
This is when you understand the market based on its ongoing events. You should conduct both to ensure greater success and prevent major losses.
Take “Short Interest” Into Account
One of the most important terms you’ll need to know when you’re interested in the process of shorting Bitcoin is “short interest.” It basically refers to how many short orders have been released into the market. Why is this important?
If you can see that a lot of traders are shorting bitcoin, then its price is likely to drop soon. Binance, as well as other cryptocurrency exchanges, will provide you with information pertaining to short orders. It’s valuable information to check out if you’re interested in shorting bitcoin.
An Example Of How To Go About Shorting Bitcoin
If you’re interested in shorting bitcoin, you can do so on exchanges such as Binance as well as others. Let’s take the example of how to short bitcoin on Binance to provide you with more information about how shorting works.
Once you’ve set up an account on Binance, you will make use of the indicators and charts to gain info about the current price trends. The “basic exchange” window is suitable for beginners and provides you with a user-friendly experience to make this part a lot easier.
- To get the most important info, you want to look at the “Moving Average” and look for the price – keep an eye out for signs the price is decreasing or about to decrease. Decreases in price are signalled by red bars.
- Always check the history of the past week or so to see when prices fell as this could help you to predict when next they will decrease.
- After choosing your bitcoin, you’ll be ready to sell it at the right time. Even after you’re ready, continue to be vigilant about the market!
- It could also be a good idea to set up what’s known as a “stop-loss” function. This can help you to reduce your losses. A stop-loss is basically when you place an order in which you decide to buy or sell once the asset reaches a specific price.
- When you notice that the bitcoin price has fallen significantly compared to other coins, you can choose to “close order” in order to send it out of the market.
- Remember that you should also take into account the fees you’ll be charged. On Binance, you’re looking at fees (if you’re not using Binance coins) of between 0.012 to 0.10 percent.
How do you limit your loss with a stop-loss order?
If you set the stop-loss order for five percent below the price at which you first bought the asset this means your loss will be limited to five percent.
What are some downsides of using cryptocurrency exchanges to short bitcoin?
If you sell on an exchange, you will depend on liquidity more than when purchasing and this will also result in more fees, such as borrowing fees and commissions. That’s something to bear in mind when choosing the best way to short bitcoin.
Shorting bitcoin is a fantastic way to predict that the market will fall and take advantage of it.
But, it’s not always as easy as it sounds. There are important things to bear in mind if you’re interested in shorting bitcoin, as well as how to go about it. Who knows?
You could make a great profit from your efforts.
That said, it’s worth entering into it with your feet firmly planted on the ground. The bottom line is that shorting bitcoin isn’t something that beginners can, or should, do.
Even if you’re more advanced, shorting bitcoin can be very risky, therefore it’s a smart idea to ensure that you only invest money that you don’t mind losing.
Last Updated on June 16, 2020 by Eito