Once you start earning bitcoin through the best crypto casino, you must decide how best to manage your cryptocurrency assets.
Here, we will explore how to short bitcoin. Shorting bitcoin is one strategy that can help multiply your crypto gambling winnings.
As far as assets go, bitcoin is well-known for being volatile. While volatility tends to scare off most investors, you can use the large, unpredictable price swings associated with bitcoin to your advantage if you are brave enough.
What Is Shorting Bitcoin?
Essentially, the logic behind how to short bitcoin is to sell the cryptocurrency when the price is high before buying it back when the price is low.
If prices drop in the interim between selling and purchasing more bitcoin, you would have correctly taken advantage of the price movements and ultimately made a profit.
Consider the following example in which you have directly borrowed BTC from an agency:
- You borrow ten bitcoins when their value is set at $4,000 each.
- You sell all ten bitcoins at their current value, making $40,000.
- The price of bitcoin drops to $3,500 each.
- You purchase ten bitcoins at this lower price to give back to the agency from which you borrowed them. This costs you $35,000.
- Once you have returned what you borrowed, you have made a profit of $5,000 ($40,000- $35,000).
So, you can see that if you figure out when and how to short bitcoin correctly, you can make plenty of profit during market value declines.
If you intend on becoming a professional bitcoin trader, understanding how to short bitcoin is essential.
It should, however, be noted that shorting is associated with significant risk and is therefore considered an advanced investment strategy.
If you are new to the crypto scene, first gain plenty of knowledge and experience before considering shorting.
Why Should Traders Short Bitcoin?
In the long run, bitcoin is set to see price appreciation. However, with cryptocurrency, we know that the game’s name is volatile, making the market highly susceptible to short-term declines.
During a market plummet, rather than letting your holdings plummet alongside it, you can choose to sure up your holdings by shorting what you have purchased.
To be more precise, different traders have different motivations behind shorting bitcoin. These could include the following:
- Valuation: this is when traders believe that bitcoin is overvalued or exists in a price bubble. They thus wait for a downward trend to short.
- The traders will use valuation metrics to predict the best time to short. They analyse the intrinsic value against the market price in what is referred to as a fundamental trading style.
- Hedging risk: This is when investors short bitcoin to protect themselves from risks associated with their larger portfolio. If you own bitcoin and suspect the market value will decline, you would open up a position and short-sell some bitcoin.
- Any profit made from a well-timed short position will help buffer you against the loss sustained by your long position during a decline.
- Scepticism: these traders are sceptical of the cryptocurrency market and expect bitcoin to be nothing more than a short-lived trend.
- These sceptical traders are often exclusively short-sellers who keep a very close watch on any bitcoin and blockchain market developments.
- Volatility: traders drawn in by the market’s volatility understand that with high risk comes the potential for high reward. If they can figure out how to short bitcoin correctly, they can exploit the market’s volatility and earn big. If their timing is off, they will incur significant losses.
Some risk-takers rely on luck, but the more successful individuals will have carefully planned strategies based on experience and know-how.
Whatever your reasoning behind shorting bitcoin, it is essential that you do it correctly. So, let’s explore how to short bitcoin and its different avenues.
How To Short Bitcoin: A Guide
You first need to get in touch with a trading agency and place a short sell order. The agency then loans you bitcoins from their stock.
So, if you purchase 10 Bitcoins for short-selling purposes, in the future, you will need to pay those ten bitcoins back to the agency – regardless of whether prices have risen or fallen.
If bitcoin prices drop, buying back the ten bitcoins will cost less than what you sold them for, and you will make money. Alternatively, you will lose money if prices rise in the interim between selling and buying.
The agency that loans you the original bitcoins for short-selling purposes can recall their assets at any time, provided they give you short notice. Be sure to carefully read through an agency’s regulations before you borrow so that you fully understand how the payback process works.
The payback process is where the risk comes in. If prices rise and the lender calls in their assets before they drop again, you will spend more than you made when you first sold the bitcoins.
Short selling is not exclusive to bitcoin; it is a trading practice associated with most stocks and large trading platforms. (For more info on how cryptocurrencies are infiltrating the stock exchanges, check out Crypto And The Wall Street Saga!)
So that is how to short Bitcoin in a nutshell. Now, let’s take a more in-depth look at some of the more specific methods of short-selling bitcoin:
Short Sell CFDs
A CFD is an acronym for “Contract for Difference.” At no stage do you buy or sell the bitcoins yourself.
You sign a deal with a platform that shorts the bitcoin for you, and you pay them the difference if a loss is made, and they pay you for any profit made.
CFDs allow you to get involved in the shorting process without going through the hassles of trading the tokens yourself.
The eToro platform offers a CFD service.
Shorting Via A Bitcoin Exchange: Margin Trading
With this method, you “borrow” money from a broker to short Bitcoin. It works something like this:
- You have $1,000 on the exchange.
- You approach a broker and “leverage” on a 1:3 ratio.
- It’s now possible to short-sell three times what you originally had (up to $3,000.)
- If the trade goes poorly, the broker will cut the trade short because you are essentially spending money you don’t have.
- The greater your leverage factor, the greater your profits or losses at the end of the trade.
The largest exchanges that leverage money for the short-selling of bitcoin include Bitmex, Bitfinex, Kraken, and Binance.
Futures Market
A bitcoin futures trade works in the same way other future trades work.
In a future trade, buyers purchase a “security,” which is attached to a contract. The contract then specifies when and at what price to sell the security.
Buy a futures contract if you believe you will make money at the specified time of security sale. And sell a futures contract if you predict losses during the security sale.
You can purchase bitcoin futures through most brokerage platforms and popular exchanges such as Kraken, Bitmex, eToro, and TD Ameritrade.
Binary Options Trading
Some specialised exchanges, such as Bitmex, allow for a call and put option for shorting bitcoin. When you purchase an option, you can (but are not obliged to) trade at a certain price by a certain date.
This option provides greater trade flexibility, but the process is complex, and it comes with higher leverages and, thus, more significant associated risks.
If you have experience with this trading method, you could gain plenty of profit. However, this is not a trading method suited to beginners.
Prediction Markets
This form of trade is new and emerging in the world of cryptocurrencies. In this trading format, investors create an event and place wagers on the outcome.
So, you might predict that the value of bitcoin would decline by a certain margin/percentage. If someone takes you up on your bet and it transpires as you said it would, you make a profit.
For a prediction market specifically dedicated to BTC, check out Predictious.
Short-Selling Bitcoin Assets
This is when you buy and short-sell bitcoin tokens directly, without any agency involvement.
When you decide to, you sell your tokens and then wait for the price to drop before you buy them back. This way, you have all the control.
Of course, if the market doesn’t do what you hoped it might, you will lose tokens.
In Conclusion
This has been a very brief guide on how to short bitcoin. If short-selling appeals to you, be sure to do plenty more research and carefully select the best method.
There are plenty of associated risks, but if you can work out how to short bitcoin correctly, the rewards will be great!
