How to Short Bitcoin — Effective Strategies

If you came across the term shorting in connection to crypto, you came to the right place for clarifications — we will address how to short Bitcoin, what it means, and how to use the concept to your advantage.

Let’s get started!

What Is Shorting Crypto?

Short-selling is a term often heard in the stock market, so you might already be familiar with it. Essentially, it means you’re selling an asset and hoping it falls in price so you can rebuy it. The difference in price provides you with profit — rinse and repeat.

Short-selling bitcoins operates on a similar principle. The primary difference is that you sell cryptocurrency instead of other assets.

How to Short Bitcoin — Six Easy Ways

While understanding short-selling crypto might be simple enough, you must still determine how to do it. A variety of options are available, each with its advantages and disadvantages.

Examine your options carefully, then decide what would work best for your situation.

1. Short Bitcoin With Options Trading

Options trading is a common option for short-selling crypto. With options trading, you’re essentially purchasing a contract that lets you buy an asset (call options) or sell an asset (put options) at a certain price point.

While both options have their uses, put options are often more beneficial in short-selling. Put options let you lock in a sales price, protecting you from market fluctuations. Even if prices go down prematurely, you can still sell your crypto for the stated price.

Options trading, however, can sometimes be complex — and if you make a mistake, it could result in large losses. It’s important to do your research and consider the risks beforehand.

2. Use Margin Trading

Margin trading is another common short-selling option and it involves borrowing funds against some sort of collateral. You’d sell these borrowed funds for the current market price — after a certain period, you’d repurchase the funds and return them to the lender, or to the margin trading exchange. 

Margin trading is relatively high in risk but also reward. Should the prices of Bitcoin fall, you can purchase them for a lower price, pay back the lender what you borrowed, and pocket the difference. However, if they rise, you’ll still need to purchase back the bitcoins to repay the lender, which could multiply your losses. In addition, you’ll likely have to pay interest on your borrowed funds until you repay them.

3. Short Bitcoin on Exchanges

Many traders may buy and sell bitcoins through reputable cryptocurrency exchanges, online platforms that help facilitate trading. These platforms work similarly to brokers; you borrow Bitcoin from the exchange, sell the Bitcoin at the current market price, and then hope the prices fall. Once they do, you can buy the Bitcoin back, repay the broker, and keep the difference as a profit.

While Bitcoin exchanges can make short-selling crypto relatively simple, they also come with some drawbacks, such as borrowing fees and commissions. Do your research on the platform you’d like to use to ensure you don’t overstrain your finances.

4. Use Derivatives Trading

Derivatives are essentially contracts. They base their trade value on the current market worth of a certain asset — Bitcoin, in this case. The price of these contracts varies depending on fluctuations in the asset’s value.

Derivatives include:

• Bitcoin Futures Trading: As the name implies, this type of trading involves selling your Bitcoin at a certain price by a certain date. Short futures position can be beneficial if you correctly predict that prices will go down; however, they can also result in potential losses if you predict incorrectly.
• Contracts for Difference (CDF): These contracts pay holders the difference between the opening and closing price. If you wanted to short-sell crypto, you’d purchase a contract predicting that prices would fall between open and close.

5. Use Predictions Markets

Making strong predictions is a key part of succeeding as an investor. The predictions market allows you to put that skill to use.

With predictions trading, you’re essentially betting on how the market will change. Investors purchase contracts with their predictions, and if they’re correct, they can make a profit. For short-selling cryptocurrency, you’d want to purchase a contract predicting that Bitcoin would decline in price and by how much.

To take full advantage of prediction markets, you must do proper analysis and pay careful attention to any existing price fluctuations. Examine previous market trends, then use what you know to create as accurate a prediction as possible.

6. Bitcoin Leverage Trading

Leveraged trading can be risky, but it comes with some incredible advantages. Essentially, it involves making trades using more money than you own. This typically involves trading in leveraged contracts — such as CDFs — or leverage tokens to help increase your market position.

To short-sell Bitcoin with leverage trading, you would predict whether Bitcoin prices would rise or fall. Whether you profit or not depends on whether that prediction is correct.

Leverage trading offers a unique advantage to investors since it allows them to bet more than they’d normally be able to. However, it may also multiply their losses should they predict incorrectly. Consider your options carefully, then pursue one that suits your situation.

What Are the Risks of Shorting Bitcoin?

Shorting cryptocurrency can come with incredible benefits, but it is an incredibly risky endeavor. To succeed in short sales, you need to accurately predict that the price will fall; if it doesn’t, you could face devastating losses.

This can be risky enough with assets such as stocks, but Bitcoin assets offer unique challenges that can make some investors wary.

The Price of Bitcoin Is Too Volatile

Bitcoin prices are notoriously volatile. One moment, the prices may rise, and investors may try to purchase what they can; the next, they may fall, and traders may scramble to sell.

This means that making accurate market predictions can be difficult. You might sell when prices are just starting to drop, expecting them to continue falling, only for them to rise drastically, which makes buying back Bitcoin more expensive.

The Regulatory Risk

While Bitcoin is available worldwide, it doesn’t have many regulations. Because there’s very little oversight, some platforms may make offers they wouldn’t otherwise be able to, which could result in profit loss.

A lack of regulation also means a lack of legal repercussions. Should something go wrong, you may find you have very few legal actions you can take against the offending party.

Notably, this lack of regulation means certain platforms aren’t available to Americans.

What Are the Benefits of Shorting Bitcoin?

If you face so many risks, why should you short-sell Bitcoin? For many individuals, it seems like it would be more beneficial to pursue a less risky investment option.

The reality is that even though the risk is high, short-selling Bitcoin can come with incredible benefits. By short-selling Bitcoin, you could make incredibly high profits — more than you might be able to make with traditional trading.

While high profits are appealing, they aren’t the only reason someone might choose to invest in crypto. Bitcoin can help diversify your investment profile and protect your current assets, should you proceed with care. Between this and the potential for incredible gains, many investors feel that short-selling crypto is worth the risk.

When Should You Short Bitcoin?

Generally, traders short Bitcoin when prices seem to be falling. To take full advantage of this, you should pay attention to:

• Whether the current market opinion toward Bitcoin seems to be positive or negative
• Are users coming into or leaving the market
• Are Bitcoin miners buying or selling coins
• Whether people are moving coins from exchanges or leaving them

Following these market trends can help you more accurately predict when short-selling Bitcoin would benefit you. For example, say you notice miners holding onto their coins. That likely means that they expect prices to rise, so you’d want to wait until they sell your coins.

Where to Short Bitcoin

Perhaps you’ve decided you want to try your hand at short-selling Bitcoin. You’ve weighed the risks and feel you can manage them without putting too much pressure on your investment portfolio. You’ve even taken the time to determine what trading strategies might work best for your needs.

However, knowing how to short BTC is only half the battle; you must also know where to short Bitcoin.

Many online platforms offer investors ways to buy and sell bitcoin with relatively little stress. We’ve compiled a list of some of the more reputable options below.

Binance

If you’re searching for a solid platform, Binance may be an excellent choice. This decentralized exchange platform offers several short-selling methods: margin, shorting futures, options, and leverage trading.

To take advantage of it, simply create a Binance account, navigate to the menu, and click on the option you prefer. The platform will provide you with prompts to help you get started.

While this platform can be useful, American investors may not have access to every trading option.

KuCoin

KuCoin allows investors to utilize margin trading, futures contract, and leverage trading to short-sell their Bitcoins. Taking advantage of this platform is relatively simple; just sign up for an account and decide what you want to trade, and the platform can guide you through the process.

Kraken

Kraken primarily offers margin trading. While futures trading is an option in some locations, it isn’t available in the United States, Canada, Australia, or the UK.

To short-sell on Kraken, begin by setting up an account and putting in the desired amount of funds. From there, hit new order. Then, you’ll want to select the advanced option, which lets you input a range of terms for your sale.

Deribit

Deribit is a popular platform that offers options and futures trading, among others. Simply create an account, click the options or futures tab, and explore the currently available trades. Once you find something you like, you can click a button to go to the trading market.

Deribit bills itself as the perfect platform for beginners and experienced traders, with accessible UI and tools to help you create a solid trading strategy.

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