How to Short Bitcoin – Updated Guide For 2021


Investing in Bitcoin can quickly turn into a stressful activity, especially if you don’t know what to do in particular situations. Regardless of the time you’ve spent trading, you’re always going to encounter specific scenarios where you have to make important decisions. Considering how volatile the Bitcoin market is, those decisions could potentially influence whether you make a profit or lose all of your investment.

Bitcoin has been going through exponential growth in value over the past years, but there is no way to predict how its value can behave in a particular moment. For example, there are some factors that can influence Bitcoin’s price, which can either make it go high or low.

Thankfully, there are some ways in which you can prepare for those scenarios and mitigate the losses. In this case, we’re going to talk about how to short Bitcoin correctly.

Keep in mind that there are several ways to short Bitcoin, and you may choose the method that fits your needs the best. However, you should always take a smart approach to this activity so that you don’t make any harsh financial decisions that could affect your investment in the future.

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What is Shorting?

First, we need to get the main concept cleared up for you. Shorting isn’t a very common thing to do due to its risks, although many traders use it as a last resort to make money off of their investment.

Shorting (or short selling) happens when investors believe that the price of an asset (Bitcoin, in this case) is likely to decrease shortly. People short sell to profit from those price drops, but they have to do it carefully if they want to avoid losing money.

In essence, what happens is that you borrow Bitcoins from a company or a person and sell them at their current price on the market. In this arrangement, you also agree to pay the Bitcoins back on a future date. If Bitcoin’s price decreased as you expected, you have to pay back a lower amount of money, which earns you a profit.

Alternatively, if Bitcoin’s price went higher, you have to pay the person/company a much higher amount of money, making you lose your investment. 

How Does Short Selling Work Specifically?

It may be confusing to understand how short selling works without an example, so we’re going to provide you with an overview of how short selling would work. Keep in mind that this is an example, and it’s only being used for educational purposes for this review.

  • Bitcoin’s current price is $58,000, so you decide to short sell five Bitcoins at that price. In that sense, you would be selling those Bitcoins for $290,000.
  • Bitcoin’s value dropped to $30,000, meaning that you only have to pay the company back $150,000. In this case, you’re earning a profit of $140,000.

Now, let’s look at the same example but from the other perspective:

  • Bitcoin’s current price is $58,000, so you decide to short sell five Bitcoins at that price. In that sense, you would be selling those Bitcoins for $290,000.
  • Bitcoin’s value increased to $60,000, meaning that you have to pay the company back $300,000.
  • In this case, you have to pay the company the full amount of your initial investment plus $10,000.

As you can see, short selling Bitcoin or another cryptocurrency can be risky if you don’t make the right decision. If you decide to short sell for any reason, make sure that you’re almost certain that Bitcoin’s price is going to decrease according to external factors that may affect its price.

Why Would You Short Sell Bitcoin?

Looking at it from a simpler perspective, short selling Bitcoin seems like a bad idea considering how much you can lose if you didn’t make the right call. However, there are several reasons why you may want to short sell your Bitcoins in particular cases.

Two of the main reasons why people decide to short sell their Bitcoins are skepticism and volatility. Many investors still believe that Bitcoin (and cryptos in general) are a short-term trend; in essence, they believe that Bitcoin can crash anytime soon, leaving thousands of people with lost money. Those investors tend to keep an eye out for Bitcoin’s latest price movements so that they can make a short sell in case Bitcoin suffers a considerable hit to its price.

On the other hand, it’s common knowledge that Bitcoin is a highly volatile asset. While its price can increase exponentially over the years, it can also decrease to the point of it becoming worthless. The worst thing about it is that there’s no accurate way to predict when or how Bitcoin may have those sudden price movements.

In those cases, traders use technical and fundamental analysis to determine how Bitcoin may behave in the future and execute their short sell trade based on their knowledge. While that doesn’t remove all the risks of losing the investment, it can reduce them.

In the end, it’s up to you to decide whether it’s a good idea to short sell Bitcoin at a particular moment. We suggest that you study its price movements carefully and wait until a clear opening so that you can significantly reduce the chances of losing your money.

How to Short Bitcoin

Now that you know the basics about short selling, it’s time for you to learn how to short Bitcoin. As we mentioned at the beginning of this review, there are several ways to short Bitcoin, and you may choose the method that fits your current knowledge and goals. 

Margin Trading

With margin trading, you’re going to borrow a particular number of Bitcoins from an exchange platform or a broker and use that borrowed money to make a short sell. 

Typically, investors can borrow up to 50% of the total investment amount. In essence, you can double the amount of the investment you’re going to make. As long as you commit to paying the loan back on time, you’re free to manage that loan as you please. In the case of short selling, a portion of your repurchasing price goes to paying back the lender.

Several exchanges and brokerages work with margin trading, so you have several options to choose from. However, keep in mind that these exchanges and brokerages may have different leverage factors or interest rates depending on the amount you’re planning to borrow, so keep that in mind before you make a decision.

When it comes to cryptocurrency exchanges, we thoroughly recommend Coinbase, Kraken, and Bittrex. On the other hand, we recommend eToro, TD Ameritrade, and Interactive Brokers if you’re looking for a broker.

Keep in mind that the main difference between the two services is that with an exchange, you’re working with the company directly, whereas a broker works as a mediator between the buyer and the seller.

Options Trading

Binary options trading can also be a great choice when it comes to shorting Bitcoin. Overall, this type of trading gives you a contract that allows you to buy and sell Bitcoin on a particular date, at a particular price. Options trading works with two main indicators, “Call” and “Put.” The “Call” contract gives you the right to purchase a cryptocurrency, whereas the “Put” contract allows you to sell a cryptocurrency.

In the case of short-selling Bitcoin, you need to focus on the “Put” contract. In essence, you would execute a “Put” order that allows you to set a particular selling date for Bitcoin, which allows you to sell it at its current price regardless if it goes up or down.

One of the downsides to options trading is that it’s considered too complex for most traders. Additionally, the use of leverage tends to become too overwhelming depending on who you work with. However, if you know how to do this type of trading, it can be an excellent choice since you lower the risks of losing your investment. In most cases, you would only be paying the contract’s premium.

Futures Market

Most assets have a futures market. In these markets, you can make an arrangement to purchase a security at a particular price and date. In the case of Bitcoin, you can make a futures contract where you can agree to buy or sell Bitcoin at a particular price and date.

For example, if your goal is to short sell Bitcoin, you may want to execute a futures contract that allows you to sell the asset at a point where you feel that its price is going to be lower. If your prediction is right, you’re likely to earn a profit from your futures contract.

Futures trading can be a good option if you want to mitigate your losses, but as with options trading, you must know how to do it if you want to avoid losing your investment. Exchanges such as Kraken offer you the opportunity to execute futures trades, but if you’re looking for brokerages, TD Ameritrade and eToro are excellent options too. 

Prediction Markets

As the name implies, these are markets where you can wager your price movement predictions. For example, you can make a prediction of Bitcoin’s decrease in price in the future. If you win the bet, you’re likely to gain a profit. 

Keep in mind that prediction markets work for several events, currency prices, and more. For example, prediction markets also work for making bets on elections, weather alterations, and company sales.

When it comes to cryptocurrencies, you may make a prediction for both an increase or decrease in price, but since we’re talking about short-selling Bitcoin, your goal is to wager on its decrease. 

As with the other methods, you should go into a prediction market only if you’re optimistic about your bet. A great way to make a smarter bet is to study Bitcoin’s recent price movements; that way, you can make a much better prediction on what its price is going to be in the future.

Nobody can make a 100% accurate guess, but it’s better than relying on luck for the results.

Buying/Selling Bitcoins

Finally, we have the process of buying and selling Bitcoins directly. You may go into an exchange or brokerage platform for this method. 

Overall, you can sell your Bitcoins at any price you consider appropriate at the moment and wait until Bitcoin’s price drops. When the asset reaches a price that you consider appropriate enough to gain a profit, you may choose to buy your Bitcoins again.

Remember that the Bitcoin and cryptocurrency market, in general, is too volatile, and it’s challenging to predict its price movements. If you sell your Bitcoins, and the asset’s price doesn’t drop as you expected, you may lose your investment and your coins.

Not many investors enjoy buying or selling cryptos directly since there are more risks to losing their investment, but it’s still an option if you want to try it out.

What Are the Risks of Shorting Bitcoin?

As we mentioned throughout this review, there are several risks when it comes to shorting Bitcoin, and you must keep them in mind if you want to avoid losing your entire investment on your first try. 

Remember that all types of Bitcoin trading are trial and error, meaning that you have to learn from everything you’ve experienced so far. If you make a mistake, learn from it and try again.

Here’s an overview of all the potential risks involving short-selling Bitcoin:

Uncertainty

When it comes to short-selling Bitcoin, there’s a limit to how much money you can make, but there are no limits for losses. There’s a profit limit because Bitcoin’s price cannot fall below $0. However, Bitcoin’s price can increase indefinitely, meaning that there’s a possibility of uncapped losses too.

While these are extreme examples of wins/losses, it’s still something to keep in mind at the time of making a short sell trade. Keep in mind that cryptocurrencies are uncertain, and their price may change drastically at any moment.

You should only invest if you’re optimistic about your predictions regarding Bitcoin’s price. Otherwise, short selling can become way too risky for you, and in some cases, you could lose much more than your initial investment.

A good rule of thumb is to have some extra money on the side to cover for your losses if your prediction wasn’t right. However, make sure that you keep an eye out for price movements and be prepared for any sudden changes.

Bitcoin’s Volatility

We recommend that you don’t engage in any trading if you notice that the Bitcoin market gets too volatile. Not all traders know how to manage the situation, and if you don’t know how to assess your risks, you are at risk of losing your investment rather quickly.

Once you notice that Bitcoin’s behavior stabilized, you’re free to create a more accurate trading strategy that fits your needs.

Poor/Outdated Information

Information is key when it comes to short selling. Even the smallest detail can influence your final short-selling decision. If you get updated and reliable information about how Bitcoin has behaved during a particular period, you’re likely to make smarter financial decisions in the future.

Cryptocurrency Short Selling Strategies:

Fundamental Analysis

In fundamental analysis, your goal is to study Bitcoin’s intrinsic value, meaning that you’re going to do research on all the economic factors and trends that have affected Bitcoin throughout its history.

This type of analysis is much better suited for long-term investments, and people believe that it doesn’t work as well for cryptocurrencies since they’re too volatile. However, making a deep study about how Bitcoin has evolved can help you evaluate what the best course of action can be in particular situations.

Technical Analysis

Technical analysis is better suited for short-term investments since your goal is to research statistical trends that you gather from Bitcoin’s price movement and volume. Overall, you’re going to use Bitcoin’s recent behavior in the market to create a trading strategy for your next trades.

This type of analysis can help you find better trading opportunities and determine which trading decisions to avoid in the near future.

FAQs

If you still have some questions regarding Bitcoin, cryptocurrencies, and shorting Bitcoin, make sure to read the following section to clear up any remaining doubts!

How to Speculate Money With Bitcoin

Short selling isn’t the only way to speculate money with Bitcoins. In fact, there are several other methods that may or may not be easier for you as a trader. We’re going to list some of the most popular methods to speculate money with cryptocurrencies below so that you can read more about them:

  • Buying and holding.
  • Trading.
  • Mining.
  • Implementing Bitcoin into your business model.
  • Micro earnings.
  • Affiliate marketing earnings.

What is the Best Moment to Short Sell Bitcoin?

The key to knowing the best time to short sell Bitcoin is to examine Bitcoin’s price charts frequently. For example, short-selling Bitcoin during a long-term uptrend can be risky if you don’t know how to identify the right moment to make the trade. 

Overall, you must do your research so that you can be as accurate as possible with your prediction; that way, you can minimize the risks that may come regarding your investment.

How Do I Identify the Best Exchange/Broker Platform for Me?

As mentioned before, there are hundreds of platforms available for you at the moment. However, you must ensure that you choose a reputable one that you can use without any security concerns.

Platforms such as Coinbase, Bittrex, Kraken, eToro, TD Ameritrade, and Interactive Brokers are some of our top-rated picks for short-selling Bitcoin. In your case, you must decide whether you want to go with an exchange platform or a brokerage firm.

Final Thoughts

Short selling Bitcoin can be an excellent way to save your investment from potential price drops, but you must do it the right way. We suggest that you think about any financial decisions you make for some time before you decide to go with it.

Remember that the key to making progress with Bitcoin trading is to be smart about it. As long as you know what to do, you’re likely to see improvement in your trading.