A Beginner’s Guide On How To Short Bitcoin

How To Short Bitcoin

Some investors are convinced that Bitcoin is going to crash soon. For them shorting the currency is a wise thing to do. With Bitcoin becoming accepted in mainstream finance, the manner in which you could short Bitcoin has also increased.

Here Are Some Ways In Which You Can Do So Without Any Issues.

1. Margin Trading

The simplest way to short Bitcoin is using a cryptocurrency margin trading platform. A lot of exchanges and platforms permit such trading. The margin trades allow the investors to “borrow” money from a broker and then make a trade. You must know that the margins involve leverage or borrowed money, which can increase your profits or reduce the losses. Most Bitcoin exchanges allow margin trading at this point, but Kraken and Binance are the most popular ones.

2. Futures Market

Just like other assets, Bitcoin also has a Futures market. In the Futures trade, the buyer agrees to purchase the security with a contract. This mentions when the security will be sold and at what price. In case you buy a futures contract, you bet that the security price will rise. This means that you will get a good deal on it.

However, if you sell the futures contract, it showcases a bearish thought and a feeling that Bitcoin prices will fall. Thus you can short Bitcoin by buying contracts that bet at a low price.

The Bitcoin futures trading increased in the run-up in the crypto prices, which started in 2017 end. Now you can find it on many platforms. You could short the Bitcoin futures at the Chicago Mercantile Exchange (CME) and other cryptocurrency exchanges as well.

The bitcoin futures can also be purchased on exchanges such as Kraken or BitMEX and brokerages like eToro and TD Ameritrade.

3. Binary Options Trading

Call and put options also allow the traders to short the Bitcoin. In case you want to short the Bitcoin, you can execute a put order through an escrow service. You should try and sell your currency at today’s price even if the price comes down later. The Binary options can be used through different offshore exchanges, but the risks and costs of the same remain high. An advantage of using binary options trading over the futures is that you can reduce your losses by deciding not to sell the put options. Therefore the losses get limited at the price you paid for the put options. Popular platforms where you can do this are Deribit and OKEx.

4. Prediction Markets

Prediction markets can be another way to think of shorting Bitcoin. The prediction markets in crypto are just like those seen in the mainstream markets. The investors could create events so that they can make wagers basis the outcome. Thus you can predict that Bitcoin will fall by a margin or percentage. In case anyone decides to take you up on this bet, you will get profited if the same happens. Some popular crypto prediction markets are Augur, Gnosis’ Omen, and Polymarket.

5. Short-Selling Bitcoin Assets

This tactic may not appeal to all investors; therefore, only those succeed who can wait to get gains from their bet against Bitcoin pricing. You get to sell the tokens at the price you want to, then wait until the price falls again and buy the exact tickets again. But similarly, here, if the price does not reach the level you wish to, you can lose your money or the Bitcoin assets.

Short selling Bitcoin leads to high costs and risks. For instance, you may have to pay the custody or Bitcoin wallet fees to store the crypto until the trade happens. You also have to tolerate the risk of price volatility associated with Bitcoin. In case the price goes up later, you may end up with losses. Some exchanges provide leverage to conduct such trades. The downside of the leverage is that your gains or losses both could multiply.

6. Using Bitcoin CFDs

CFD or contract for differences is a financial strategy that offers you money basis the gap between the open and closing prices. The Bitcoin CFD’s are very similar to the Bitcoin futures in the fact that they are bets on the Bitcoin’s prices. When you purchase any GFD and predict that the prices will fall, you are actually shorting your Bitcoin.

Different from Bitcoin Futures, CFDs have a highly flexible settlement tenure. Bitcoin CFDs do not need the physical delivery of the cryptocurrency.

So you need not pay anything on the custody charges. In Bitcoin CFD markets, the traders get to enter a contract that is based on the crypto’s performance or the performance which is relative to the fiat currency or any other crypto.

7. Using Inverse Exchange-Traded Products

Inverse exchange-traded products could be bets where the underlying assets price will fall. They are pretty the same as futures contracts, and you can use them along with other derivatives and produce returns. Products that you could use here to bet on the price decline for the crypto using the exchange-traded products are BetaPro Bitcoin Inverse ETF (BITI.TO) and Shares Short Bitcoin ETP. However, both these products are not for U.S. Residents.

Factors To Consider While Shorting Bitcoin

Just like any strategy shorting of Bitcoin comes with a lot of risks. Here are some factors you must consider when you think of doing so.

Bitcoin Price Is Volatile

We all know how volatile the Bitcoin price can be. The avenues to short Bitcoin are dependent on the derivatives. The derivatives, on the other hand, rely on Bitcoin pricing, and any fluctuations in the crypto’s price are going to have a bouncing effect on the gains and losses of an investor.

For instance, the Bitcoin futures will mimic the price changes, so you cannot use them as a hedge against your investment. These options trading in Bitcoin will multiply the losses thanks to Bitcoin’s price volatility.

Bitcoin, As An Asset, Is Risky

Price is one of the several things you need to evaluate when you short Bitcoin. In comparison to the other assets, Bitcoin is still nascent. It came into the scene 13 years back. There is not much information and data for the investors to decide about how Bitcoin functions as an asset.

Several issues that relate to Bitcoin forks still remain unresolved. Platforms like CME are safe and provide execution for these Bitcoin derivatives. The new platforms remain prone to hacking.

The Regulatory Status For Bitcoin Is Still Unclear

Though Bitcoin claims it has global coverage, its regulatory status across the geographics is not proven yet. Platforms that lead to Bitcoin trading like Deribit, FTX, and OKEx are not for American investors.

The absence of a regulatory oversight implies that the exchanges escape anything that could not be allowed if there was an oversight. For instance, Binance offered a 125% leverage in Bitcoin futures trading until now. This lack of clarity about the regulatory status implies that the legal recourse for customers of such exchanges is less.

Knowledge Of Order Types Is A Must

Before you decide to short in Bitcoin, you will have to brush your knowledge of the different order types. This will help reduce your losses if the prices do not move as you want them to. For example, if you use stop-limit orders in trading derivatives, you could reduce the losses.

Shorting Bitcoin FAQs

Can Bitcoin Be Shorted?

Yes, you could short Bitcoin’s price if you bet against it through derivatives like Futures and options. But it is essential that you keep in mind the risks associated with doing so.

What Are Some Of The Most Common Ways To Short Bitcoin Pricing?

The easiest way to short the Bitcoin is if you short the derivatives like Futures and options. For instance, you could use the put options and bet against the crypto’s price. CFD or contract for differences is when you get the difference between an asset’s actual price and your expected price and is another method to short the Bitcoin pricing. Prediction markets can be another way to short the Bitcoin.

What Are The Risks Of Shorting Bitcoin?

There could be two risks of shorting Bitcoin. First is the price risk. The volatility in the price can make it tough to predict how the price of the asset will move. The second risk remains the absence of a standard regulatory framework for Bitcoin worldwide. Some big futures trading venues for Bitcoin are unregulated. These investors have fewer recourse options if something is wrong with the trade.

Can I Short Bitcoin Using Leverage?

Crypto exchanges like the Binance and Futures trading platforms allow you to use the leverage or borrowed money when you want to place bets on Bitcoin pricing. But remember that the leverage could increase either gains or losses. That means the risk when you use leverage is comparatively high.


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