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How To Go About Shorting Bitcoin

how to go about shorting bitcoins

October 25, 2021 | 

2094 Views | 

Jesus Guzman | 

Get Into Cryptocurrency Trading Today

The cryptocurrency market has seen many unprecedented changes over the past decade, and new opportunities to take a position in the world's largest cryptocurrency market, bitcoin, continue to emerge.

As you may already know, bitcoin is a highly volatile digital asset, characterized by unpredictable fluctuations and changing price movements.

In 2018, for example, there was a general slowdown in the cryptocurrency market, likely due to increased regulation, which caused bitcoin to lose more than 80% of its value. It fell from over $17,000 in January to around $3152 in December.

This was the perfect opportunity for short sellers to short bitcoin and profit. Shorting Bitcoin is an attempt by traders to take advantage of Bitcoin's volatility to profit, but it also comes with risks.

What is shorting Bitcoins?

When shorting Bitcoin, you sell Bitcoins when the price is high in the hope that the value will fall, and then buy them back at a low price. This way you profit from the market difference.

The philosophical mantra of short sellers is to buy low and sell high. If your prediction was correct and the bitcoin value falls, you profit from the price difference between selling your bitcoins and buying back the asset.

Reasons for shorting bitcoins

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

If you are a beginner, you can not just jump into shorting bitcoin without checking your motivation for doing so. Many people short sell bitcoin for some of the following reasons:

Hedging the risk of Bitcoin

You can short sell Bitcoin to hedge the risk of your broader portfolio. For example, if you have some Bitcoins in your wallet but predict that their value will fall in the short term, you may decide to open a short position on Bitcoin. If your prediction was correct, the profits from your short position could minimise the loss from your long position.

Current valuation of BTC

Many investors who believe that Bitcoin is in a bubble or is overvalued wait for a downtrend in the price to go short. Traders who apply valuation principles when trading Bitcoin follow the indicators of fundamental analysis, which assesses the intrinsic value of an asset against its market value.

Volatility of Bitcoin and price movement

Based on past price movements, it is clear that Bitcoin can gain as quickly as it can lose value. Risk-averse traders are usually attracted to highly volatile assets like Bitcoin because they have the opportunity to make incredibly high profits or equally high losses. Here, traders use a structured mechanism based on extensive knowledge and experience, while others rely on luck.

Scepticism regarding Bitcoin market

If you are sceptical about the cryptocurrency market and believe that Bitcoin is a short-term trend, you can short Bitcoin. If you are this type of short seller, you need to follow the latest advances in Bitcoin and Blockchain and not let opinions sway you from your objectivity.

How to short Bitcoins

There are numerous ways to shorting Bitcoins, including:

Bitcoin margin trading

Shorting bitcoin through a crypto trading platform is one of the easiest ways to short bitcoin. Margin trading involves traders borrowing money from the broker to facilitate the transaction. You can do this type of trading through a crypto exchange like Binance or a broker. However, note that there is a leverage factor that can increase your profits or losses.

Bitcoin Futures markets

Another way to short bitcoin is through bitcoin futures contracts. In futures contracts, the buyer and seller agree to trade bitcoins at a certain price on a predetermined date in the future.

If you are the buyer, you assume that the bitcoin price will rise in the future, so you can make a profit when the contract expires. However, if you are the seller of a futures contract, you are pessimistic and believe that the bitcoin value will fall in the future. So that's one way to sell bitcoin short. Popular bitcoin futures brokers are CME, TD Ameritrade, Bakkt, etc.

Options trading for shorting bitcoins

You can consider call and put options for shorting bitcoin. Here is how it works. If you want to sell bitcoin short, you can execute a sell order with an escrow service. This means your goal is to sell bitcoin at today's price, regardless of whether it goes up or down later. Trading binary options involve high costs and risks.

Bitcoin prediction markets

Prediction markets are another way to sell bitcoin. They allow traders to bet on the outcome. For example, you believe bitcoin will fall by a certain margin or percentage, and someone takes the bet. If your bitcoin prediction is correct, you profit. Although prediction markets have not been around long in the crypto market, they are a good way to short bitcoin.

Shorting Bitcoin assets

If you are interested in trading the actual bitcoin currencies, you can short sell them directly. This means that you sell the tokens at a certain price that you agree with, and then wait until you can buy them back at a lower price. However, you can suffer significant losses in the process if the prices do not develop as desired.

Minimize your risks when shorting bitcoins

When shorting Bitcoin, it is important that you stick to your risk management strategy. Risk management plans such as profit taking and loss orders allow you to keep your trading process consistent.

Once you have found a way to manage risk, open a short position. Here you need to monitor anything that could affect the bitcoin price through news and market analysis.

Shorting Bitcoin final words.

Shorting Bitcoins requires a deep understanding of the market and trading strategies. Therefore, take time to understand bitcoin and the risks of short selling before you start.

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