The most basic approach to trading Bitcoin is to purchase at a discount and then sell when the price rises. What if, however, we informed you that there is another method to avoid it? Bitcoin may be sold at a high price and then purchased at a lower price. Bitcoin may be “shorted,” or borrowed against.
When investors “short” a cryptocurrency, it’s because they anticipate the value of that asset will decline, or perhaps collapse, in the future. In addition, although buying and selling bitcoins is a tried and true method, shorting bitcoins is a fantastic strategy to take advantage of a falling market. But not all investors are fans of short sell bitcoin. Let’s check out how to short Bitcoin.
What is shorting bitcoin?
When you “short” bitcoins, you sell them at the current market or limit price with the intention of purchasing them again at a lower price. The principle of “buy cheap, sell high” is still valid, albeit in a more inverted form. A trader who anticipates a decline in Bitcoin price but still hopes to benefit from it may engage in short selling. As an additional point, shorting is a prevalent investing strategy in the more conventional asset markets. Its prominence in the crypto sector might be related to the instability surrounding the area. The more uncertain the market, the more possibilities there are to make money shorting.
1. Profiting on the Margin
Using a cryptocurrency margin trading platform is one of the most convenient methods to short Bitcoin. Trading on margin allows investors to “borrow” money from a broker in order to conduct a deal, and it is offered by a wide variety of exchanges and brokerages. It’s vital to keep in mind that margin entails leverage, or borrowed money, which may magnify gains or worsen losses. Kraken and Binance are two of the many famous Bitcoin exchanges that now enable margin trading.
2. Short Selling Bitcoin Assets
While betting against Bitcoin’s price might be risky, it could pay well for those with the stomach for it. Sell off tokens at a price you are comfortable with, wait till the price declines, and then acquire tokens again. And if the price doesn’t go the way you anticipate it to, you might end up out of pocket or without your Bitcoins.
There are significant expenses and hazards associated with short-selling Bitcoin. Custody or Bitcoin wallet costs, for instance, may be required to hold the cryptocurrency until the exchange takes place. Bitcoin’s price volatility is a risk you’ll have to take on as well. There is a risk of incurring heavy losses if the price rises (rather than falling, as was planned). Leverage is available for trading on certain exchanges. Leverage’s potential to exaggerate wins and losses is another potential drawback.
3. Trading in Binary Options
Traders may “short” Bitcoin using call and put options as well. To short currency, a put order must be placed, often via an escrow provider. Consequently, you should try to sell the currency at today’s rate even if the rate falls in the future.
There are a number of offshore exchanges where you may purchase binary options, but they come with substantial fees and hazards. Limiting your losses by not selling your put options is one of the benefits of trading binary options rather than futures. As a result, you are protected against catastrophic losses beyond the amount you initially invested in the put options. Options exchanges like Deribit and OKEx are widely used.
4. Investments in the Futures Market
You may also think about shorting Bitcoin in prediction markets, which are like betting exchanges on the results of future events. Foresight exchanges in the cryptocurrency industry are analogous to those in traditional finance. Investors might set up a bet on a result of their own making.
In this way, you may place a bet that the price of Bitcoin would fall by some specified amount, and if anybody else accepts your wager, you’ll win if your prediction comes true. Augur, GnosisDAO, and Polymarket are three of the most well-known crypto prediction markets.
5. Bitcoin CFDs
Contract for Difference (CFD) is a derivative financial instrument similar to futures contracts. No normal buying and selling is involved. Instead, participants wager on the starting and closing values of Bitcoin over a certain period of time through a contract. There is always an initial price and an ending price in each settlement contract. The gain is equal to the disparity. Bitcoin CFDs use either another cryptocurrency or traditional fiat money to follow the price of bitcoin.
Why Short Bitcoin?
The question of whether or not to short Bitcoin is just as essential as the question of how to short Bitcoin. The following are some things to think about while shorting Bitcoin.
Because of Bitcoin’s status as the most popular cryptocurrency, its price is very unlikely to collapse to near zero for a very long time. Unlike lesser-known ‘altcoins,’ Bitcoin’s value has not been known to spike to extremes before crashing to near nothing over the course of a few months. Knowing that Bitcoin’s daily volatility (rapid price changes) is your primary source of profit as a short seller is more significant than anticipating a large, permanent decline in price.