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How To Go About Shorting Bitcoin

how to go about bitcoin shorting

May 25, 2021 | 

735 Views | 

JOHN K MWANIKI | 

Get Into Cryptocurrency Trading Today

The cryptocurrency market has seen many unprecedented changes in the last decade, and new opportunities for taking a position on the world's largest crypto bitcoin continue coming up. As you may already know, bitcoin is a very volatile digital asset characterized by unpredictable fluctuations and different price movements.

For instance, in 2018, there was a general slowdown in the cryptocurrency market, probably due to increased regulations which saw bitcoin lose more than 80% of its value. It fell from above $17,000 in January to around $3152 in December. That gave the short sellers a perfect chance to short sell bitcoin and profit. By shorting bitcoin, traders try to take advantage of its volatile nature to profit, but it also comes with risks.

What is shorting bitcoin?

Shorting Bitcoin is selling bitcoins when the price is high, hoping that it will decline in value to repurchase it at a low price. By doing that, you profit from the market difference. The philosophical mantra of short sellers is to buy low and sell high. If your prediction was accurate and bitcoin value drops, you profit from the price difference between selling your bitcoins and repurchasing the asset.

Reasons to short sell bitcoin

You can short sell bitcoin just like any other financial asset, but the process can be complex and risky. It also depends on whether you would like to use a leveraging trading provider or a cryptocurrency exchange

If you are a beginner, you can't just get into short-selling bitcoin without evaluating your motivation to do so. Many people short bitcoin for some of the following reasons:

Hedging risk

You can short-sell bitcoin to hedge the risk of your more extensive portfolio. For example, if you hold some bitcoins in your wallet but predict that their value will fall in the short term, you can decide to open a position for shorting bitcoin. If your prediction was accurate, your short position profits could minimize the loss from your long position.

Valuation

Many investors who believe that bitcoin exists in a bubble or is overvalued wait for a downward trend in price movements to short sell it. Traders who use valuation principles to trade bitcoin follow the fundamental analysis indicators, which involves assessing the intrinsic value of an asset against its market value.

Volatility

It is very apparent from previous price movements that bitcoin can appreciate as fast as it depreciates. Traders ready to take risks are usually drawn to high volatile assets like bitcoin since there is a potential to reap incredibly huge profits or equally significant losses. Here, traders use a structured mechanism established on extensive knowledge and experience while others rely on luck.

Skepticism

If you hold a bearish sentiment towards the cryptocurrency market and believe that bitcoin is a short-term trend, you can short bitcoin. If you are this kind of a short seller, you have to monitor the latest advancements in bitcoin and blockchain and not let opinions come in the way of your objectivity.

How to go about shorting bitcoin

There are numerous ways to short bitcoin, including:

Margin trading

Shorting bitcoin through a crypto trading platform is one of the easiest ways to short bitcoin. Margin trades allow traders to borrow funds from the broker to facilitate the transaction. You can access this kind of trading from a crypto exchange like Binance or brokerage. But keep in mind that there is a leverage factor that can increase your profits or losses.

Futures markets

Another method of shorting bitcoin is through bitcoin futures contracts. In futures products, the buyer and the seller commit to trading bitcoins at a set price on a predetermined future date. If you are the buyer in the agreement, you believe that the bitcoin price will rise in the future, assuring you of a profit when the contract expires. However, if you are the seller in a futures contract, you hold a bearish sentiment and believe that bitcoin value will decline in the future. Therefore, that is a way to short sell bitcoin. Popular bitcoin futures brokers include CME, TD Ameritrade, Bakkt, etc.

Binary options trading

You can consider call and put options for shorting bitcoin. Here is how it works. If you would like to short bitcoin, you can execute a put order with an escrow service. That means your objective is to sell the bitcoin at today's price, whether it stands or falls later on. Binary options trading comes with high costs and risks.

Prediction markets

Another method for shorting bitcoin is through the prediction markets. They allow traders to wager based on the outcome. For instance, you believe that bitcoin will fall by a certain margin or percentage, and someone takes up the bet. If your prediction is correct, you profit. Although prediction markets have not been in the crypto market for an extended period, they are an excellent way to short bitcoin.

Short selling bitcoin assets

If trading in the actual bitcoin currencies interests you, you can short sell them directly.  That involves selling the tokens at a specific price you are comfortable with and then waiting to repurchase them at a lower price. But you can incur significant losses if the prices do not adjust as you wanted them to.

Minimize your risks

When shorting bitcoin, it is imperative to stick to your risk management strategy. Risk management plans like taking profit order and loss orders allow you to maintain the consistency of your trading process.

Once you have a way to manage risks, open a short-selling position. Here, you have to monitor anything that could impact the price of bitcoin through news and market analysis.

THE TAKEAWAY

Shorting bitcoin requires an in-depth understanding of the market and trading strategies. Therefore, take your time to understand bitcoin and the risks of short selling before you begin.

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