For anyone convinced that Bitcoin (BTC) might crash in the future, shorting the currency might be a great option. The number of platforms and ways in which you can short Bitcoin has increased with the crypto’s increasing spotlight in mainstream media and finance.
You might be quite wrong in case you believe that you can just make money in cryptocurrency when the markets surge. It means that you are unfamiliar with the concept of shorting cryptocurrencies. Shorting lets you make profits when the market plunges.
Thus, if you think that Bitcoin or any other crypto will crash in the future, going for a shorting position seems to be a perfect idea.
But is it simple? Before placing your first shorting trade within the crypto space, you need to know how it works and the math that comes with it.
What Does Shorting Crypto Or Bitcoin Mean?
The idea behind shorting involves selling bitcoin or any other crypto at high prices and then buying it back at a lower price. Normally, a majority of traders prefer buying at low prices and selling when the price goes up. However, when it comes to short, you just have to do the opposite.
To enter a short position, you have to borrow cryptos and sell them on a crypto exchange at the current prices. After that, you need to purchase the crypto later and repay the capital that you borrowed.
In case the price of the asset drops when it is time to repay your capital, you profit from the difference between the selling and buying price. Nonetheless, to help you understand better, here is an example:
- For this instance, we are going to short Bitcoin and 20 coins are involved. The current market price of every Bitcoin is $20,000 leading to a total of $400,000.
- To execute the trade, we will need to borrow 20 Bitcoin from the broker at the current market price.
- Now the market is moving as expected, and the price of one Bitcoin drops to $15,000, leading to a total of $300,000.
- Hence, we purchase at this market price and return the funds to the broker.
- Now let us calculate, Previous Market price ($400,000) – Current market price ($300,000) = Profit ($100,000). That is what you will book as a profit.
In general, shorting means the opposite is going long. This shorting concept comes in handy whenever you expect a currency’s value to plunge. On the flip side, it is advisable to go long when you are convinced that the market price will rise.
However, shorting comes with several risks. Thus, if the market does not move as expected, you might have to purchase a currency at a higher price to pay back your broker.
How To Short Bitcoin?
Now there are various ways of shorting Bitcoin or various types of short trading concepts. Some of the known ones are the following:
Margin trading is believed to be the easiest option. Most of the crypto exchanges that support margin trading like FTX, Binance Futures, and Phemex. In this trading strategy, you are borrowing crypto from a broker to execute a trade.
Furthermore, you need to know that margin involves borrowing or leveraging money. It means that it cannot just increase your profits but push you to greater losses.
Normally, the broker offers you a particular percentage of the money you can borrow from the exchange and then use it for your trading operations. Moreover, after a specific number of days, you will have to return the money that you borrowed and settle down the transaction.
Just like any other asset, Bitcoin, also, has a future market. In a futures trade, you are purchasing security with a contract. This contract specifies when and at what price the security will get sold. In case you acquire a futures contract, you are betting that the price of the security will rise. So you can get a good return on investment (ROI).
On the flip side, in case you believe that Bitcoin’s value will plunge in the coming future. Afterwards, you need to acquire contracts that bet on a lower crypto price.
In general, when you are shorting futures, you agree to sell a contract at a lower price. Moreover, the best part about it is that new traders can enter the market with a modest investment.
CFD is an acronym for contract for differences. That financial strategy pays out money according to the price difference existing between open and closing prices for settlements.
It is a comparable concept to Bitcoin futures since they are betting on the crypto prices. Thus, when you buy a CFD, you are betting that the Bitcoin price will drop. That is where you short Bitcoin.
For example, in case Bitcoin is trading at $20,000, you short-sell it and then close your position when the price reaches $15,000. Hence, you made a profit of $5,000. Moreover, the great part of CFDs is that they have a flexible settlement tenure, as opposed to the Bitcoin futures.
There are binary options that can be used to short Bitcoin. The call and put options are a popular concept where you have to execute a put order using escrow or other services. Your primary goal is to offload the currency at the current price, even when the market price plunges later on.
Many offshore exchanges are available offering you binary options. However, it involves high costs and huge risks. Nonetheless, the main benefit is that you can control your losses by not deciding to sell your put options. Hence, you are just taking a loss of the money that you spent on setting up a put order.
In general, it is a near-term and limited-risk contract trading type. There are two possible outcomes. The first outcome, you make a profit that you have predefined. On the other hand, you lose the funds that you used to open the trade.
The prediction market is another option you can use to short Bitcoin. That is quite similar to the mainstream markets. Being a trader, you can create an event to make a wager according to the outcome. You will need to predict that the price of Bitcoin will plunge by a certain percentage or margin.
If anybody takes up on the bed, you will get a profit in case your prediction comes true. You may also say that whenever you are opening a prediction market shorting trade, you bet that the value of the crypto will go down. There is no need to lend these funds to anybody. In case your bet hits the bull’s eye, you walk away with your profit.
Short-Selling Bitcoin Assets
Although this method does not appeal to all investors, those who can withstand the pressure and risks can reap gains in case their bet against Bitcoin pricing succeeds. Sell off the tokens at a price that you are ready with, wait until the price plummets, and then buy tokens once more. In case the price fails to adjust as you anticipated, you might lose your money or Bitcoin in the process.
Short-selling Bitcoin also comes with high risks and costs. For instance, you may have to pay custody or Bitcoin (BTC) wallet fees to store the crypto until the trade happens. You also have to bear the risk of BTC’s price volatility.
In case the price surges instead of dropping as you hoped, you may end up with considerable losses. Various exchanges also provide leverage for executing these trades. Also, the disadvantage of using leverage is that it could amplify losses or gains.
Benefits And Drawbacks Of Shorting Bitcoin And Other Crypto
When you short bitcoin, you are always hoping that you get a profit out of it. No trader executes a transaction expecting losses. Short selling might seem easy. However, you need to know that it comes with high risks in case the market does not go as you expected.
But in case it does, it can bring you huge profits. Nonetheless, for you to understand better, here are some of the risks and rewards in the cryptocurrency market:
- Without a proper market study, you can easily face infinite losses when trying to short bitcoin.
- Margin interest accumulates with short selling.
- You will require a margin account to start selling short.
- It requires a small initiation capital to start.
- Shorting provides a great opportunity to earn huge profits.
- With shorting crypto and bitcoin, you can readily leverage investments.
That is how to short Bitcoin and any other cryptos. But, experts advise that you should only short Bitcoin when you are sure that the market is going to crash. Thus, always wait for proper signals before executing your trade. Furthermore, start with a small margin only to avoid huge losses.