How to Short Bitcoin?

Trading cryptocurrencies in the market involves being familiar with various special techniques and financial instruments that help you make the best out of your trading strategy. 

Many crypto investors opt to go short on an open position, i.e., short Bitcoin, as one of the most frequently employed trading techniques.

Here’s what it’s all about.

What Is Shorting Crypto?

Shorting crypto, or going short on an open trading position, implies that the investor has borrowed crypto intending to sell it on the market, expecting that the price of the invested coins will plummet. 

If this scenario comes true, the investor will be able to repurchase the borrowed amount of cryptocurrency for a lower price, return them back to the crypto lender, and profit from the difference in price. 

Did you notice what just happened? The trader basically ‘shortened’ the price of the cryptocurrency used in the trade, hence the name of the strategy. 

To this end, Bitcoin can be shortened like any cryptocurrency. 

How to Short Bitcoin?

There are several ways you can short Bitcoin. These include margin trading, trading BTC on the futures market, trading on BTC CFDs (contracts for difference), or prediction markets. 

Shorting Bitcoin With Margin Trading

A number of decentralized exchanges offer you the possibility to short Bitcoin by trading on margin. Basically, investors borrow money from the platform to increase their investment capital. Then, they can buy larger amounts of BTC. 

When Bitcoin experiences a downfall in price, the investors sell their BTC balances and have enough left to cover the loan and keep the rest of the amount as a profit. 

Please note that margin trading is one of the most volatile financial instruments on the crypto market, as dealing with cryptos on margin can exacerbate potential losses as much as it can boost them. 

Shorting BTC by Trading on Futures or Options

Advanced financial instruments like futures and options contracts make it possible to lock in a price to purchase or sell Bitcoin at a future date. 

The main difference between these two Bitcoin-shorting options is that with futures contracts, you must make the transaction ahead of the future date noted in the contract, while trading crypto on options contracts (as the name itself implies) gives the investor an option to go through the deal or cancel it if they have a change of heart. 

Prediction Markets 

In essence, prediction markets are future markets by nature. The market participants who short Bitcoin through a prediction market don’t trade real assets, i.e., they don’t own any of the assets they trade. This is a great option for those who don’t like to invest actual money in cryptocurrency but want market exposure. 

These investors basically make an effort to predict the future price of an asset. With the help of these markets, the results of the investors’ predictions become tradeable through the futures contracts. In most cases, the value of these contracts reflects the chances of materializing the price predictions. 

Since a larger number of crypto investors often exchange more in-depth market insights and knowledge on the future price fluctuation of a specific digital asset, prediction markets are characterized by great efficiency.

If a vast majority of these traders expect to see a price decline of an asset, it would be logical to conclude that their prediction has a higher possibility of coming true than the bet of an individual trader.

Shorting Bitcoin by Trading on CFDs (Contracts-for-Difference)

Contracts-for-difference (CFDs) contracts for shorting Bitcoin that help investors profit from the difference in the asset’s price between the time the contract was opened and the time it was closed. 

These are typically short-term contracts that enable traders to profit by assuming an asset’s end price without actually holding it in their balance. 

CFDs usually come along with hefty fees, so the risk of a financial loss is even higher than shorting Bitcoin on a prediction market if the market movements turn against the investor’s luck.  

Where to Short Bitcoin?

The most convenient way to trade on margin is through a crypto trading platform that specializes in advanced trading services, such as Binance or PrimeXTB. Some of these exchanges enable you to take a loan amounting to up to 100x of your balance holdings which automatically increases your investment capital and amplifies your purchase power 100 times. 

Is Shorting Crypto Safe?

Needless to say, shorting crypto imposes a high degree of risk. First of all, you have to use extremely volatile financial instruments, such as margin trading and trading on futures/options contracts. 

While you don’t get to hold the traded assets with these trading instruments, you have to take on a loan that might turn into a hard-to-repay debt if your speculations on the price of an asset turn sour. 

Again, if the market movements turn against you, the platform you’re using might close your market position to regain the loaned assets. This means that you could end up with far less money than what you initially invested to enter the deal. 

Moreover, the crypto market is extremely volatile and changes rapidly, which makes it even harder for a trader to speculate on price movements. All this implies that the risk of financial loss is multifold and lurks with each step of the trading process. Therefore, you should never invest more than you’re ready to lose. 

This, of course, goes for taking a crypto loan, too. You should first weigh your trading options and chances of having your predictions realized well before committing to an investment using assets that you practically don’t possess.

Bitcoin, as a tradeable asset, is the most volatile one of them all. In the bargain, cryptocurrency regulations are unequal in all jurisdictions, and not all exchanges are supervised by a financial authority. 

Therefore, some of the non-regulated crypto exchanges could provide you with an option to short Bitcoin or use a volatile financial instrument and then easily revoke their responsibility if you suffer a loss due to a security issue on their platform or malfunctioning of some of their trading instruments. 

Last but not least, trading cryptocurrencies requires sufficient knowledge of at least the basics of crypto trading and how blockchain transactions function. You’ll also need to be well informed on the trading instruments you’ll be using in your trading strategy.

In turn, becoming familiar with the trading concepts and financial mechanisms could save you from making an irrational investment and suffering potential financial losses. 

Conclusion

It’s a notorious fact that cryptocurrencies are volatile by nature and come along with a high risk of sudden losses. Bitcoin is no exception to this claim. Moreover, holding the number one position of the most valuable and liquid coin in the industry, Bitcoin is even more prone to market fluctuations than any other cryptocurrency. 

While managing the risk of investing in BTC is easier said than done, it’s very important to remember that this particular coin has a pattern of recovery that can be somewhat comforting for future Bitcoin investors. Therefore, for those fearing that Bitcoin’s price will go down at some point in the future, shorting Bitcoin might turn out to be the best trading strategy.