Many of you may have an investment in Bitcoin and due to restrictions on certain crypto exchanges cannot sell or trade them and feel helpless watching your investment rapidly decline.
What Does Shorting Bitcoin Mean?
The aim in shorting is to sell the cryptocurrency at a high price and buy it back at a lower price. Short sellers profits from the price movement between when they sold the asset, and when they bought it back. If the price falls, they will make money. If the price rises, they will lose money. If you are going to short crypto, it’s imperative that you are able to take these kinds of risks.
Ways to Short Bitcoin
Bitcoin is at 2017 levels and whilst always volatile and risky we have seen a massive sell off from its November 2021 highs. Whilst you may be unable to trade your Bitcoins because of your crypto exchange, you can prevent further downside and hedge your position by selling Bitcoin.
There are a number of ways in which you can short bitcoin:
- Margin Trading
For example the price of 1 BTC is $100, you are predicting that the bitcoin price will drop to $80 and want to short sell your bitcoin. You borrow 5 bitcoins and now you own $500 (you are short of 5 bitcoins). You can then buy your bitcoins for $400 and pay the loan you had borrowed. Without initially having the resources to do so, you have made $100 profit.
- Futures Market
Like other assets, bitcoin also has a futures market. Bitcoin futures are a legal contract that allows you to buy or sell bitcoin on a specific date, for a specified amount. When a bitcoin futures contract is taken out, the buyer (or seller) commits to buying (or selling) an agreed quantity of bitcoin at an agreed price on a particular date.
In this context, you can short Bitcoin by purchasing contracts that bet on a lower price for the cryptocurrency.
You can short Bitcoin futures at the Chicago Mercantile Exchange (CME), the world’s biggest derivatives trading platform, and on cryptocurrency exchanges.
- Bitcoin CFDs
A contract for differences (CFD) is a financial strategy that pays out money based on the price differences between the open and closing prices for settlement. Unlike exchanges where you borrow the cryptocurrency, with leveraged trading products you do not own the underlying asset. Instead, you take a position on whether bitcoin’s price will rise or fall, and your profit or loss is dependent on if you are correct or not. When you purchase a CFD predicting that Bitcoin price will decline, you are shorting Bitcoin.
- Bitcoin Options
Some cryptocurrency exchanges offer bitcoin options (Call and put options) to enable traders to short Bitcoin. Options contract provides you with the option (and not an obligation) to buy or sell bitcoin at a specified price within a specific date range. Options contracts are recommended for advanced traders due to their level of complexity and the use of leverage. They are, however, a flexible option for short selling bitcoin as you only initially risk the options contract premium.
Factors to Consider While Shorting Bitcoin
As with any investment strategy, shorting Bitcoin is accompanied by enormous risk. Here are some things that you should consider while shorting Bitcoin:
- Bitcoin price is highly volatile.
- Bitcoin’s regulatory status across geographies is still unclear.
- Bitcoin as an asset is risky because it hasn’t been around for long compared to other type of assets.
Although the potential for profit when trading bitcoin can be high, be aware of the high levels of risks associated with shorting bitcoin, especially when trading with leverage. Before you undertake a short position in Bitcoin, knowledge of different order types is a must, they can help limit losses if the price trajectory does not go in the direction that you bet initially.
New to investing? Read about How to keep your investment decisions simple.
This article does not take into account the investment objectives, financial situation or needs of a particular person or entity. Before acting on any investment strategy or advice you should first consult with your current ASIC accredited investment professional or seek out a compliant investment professional for such.