How to Short Bitcoin?
Cryptocurrency markets are highly unpredictable and very volatile. These are the two essential and basic facts that practically every trader knows about the cryptocurrency ecosystem. Especially in a time like this, when the markets are going through a strong, bearish trend, trading can be a risky prospect. Regular traders who invest in cryptocurrencies and wait for the prices to rise might have to wait for a really long time before they see any real money. However, a smart way to make profits in a bearish market is by shorting bitcoins.
Let us take a closer look at what shorting Bitcoins (also known as short selling Bitcoins) means and try and understand the various ways in which you can short Bitcoins to make a profit even when the price of the currency is on a continuous decline.
What is Shorting?
The concept of Shorting (or short selling) comes from the traditional trading markets. The end goal of every trade is to make profits - and smart traders can make profits even when the price of a commodity is crashing. Shorting, in the simplest of words, is betting against the price of an asset - borrowing the asset from the markets at a time when the price is high and selling it at that price. When the price of the asset reduces, it is then re-bought and returned to where it was borrowed from. The difference between the price of sale and the price after the fall is the profit.
This is a practice which is common in the stock markets and the commodity markets - and is gaining major momentum in the cryptocurrency markets too. Shorting of Bitcoin has now become quite popular and people are coming up with a number of unique ways to short Bitcoins to make profit at a time when the currency has fallen from $19700 to $6400.
What is Bitcoin Shorting?
Shorting of Bitcoin is pretty similar to how one would short shares or commodities. The simplest way to understand it is to assume if you borrow one Bitcoin (worth $10,000) from a friend of yours and sell it into the markets immediately. Two months later your friend wants his Bitcoin back - you buy a Bitcoin (now worth $6500) and return it to him. In this process, you make a profit of $3500. This is the most basic essence of how shorting works.
However, it is hard to find a friend who would agree to give you a Bitcoin and expect your to return the Bitcoin in its BTC value. Such transactions between people are usually done based on the US Dollar value of the Bitcoins that you are borrowing/selling. However, there are various ways in which you can short Bitcoins.
How to Short Bitcoin?
Now that you understand what shorting is and how shorting is a profitable proposition in the cryptocurrency space, let us take a look at some ways in which you can short Bitcoins:
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Margin Trading
Margin trading is one of the best options available for anyone looking forward to short Bitcoins. Margin trading is a feature that many cryptocurrency exchanges have incorporated as well. Under margin trading, users are allowed to ‘borrow’ Bitcoins from a broker and make a trade. However, there might be a leverage involved in such situations and the leverage might be lost in case of a loss. However, if all goes right, margin trading is among the best ways to short Bitcoins. Exchanges such as Bitfinex, Bitmex, Avatrade among others allow margin trading.
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Futures Markets
Another very popular way to short Bitcoins is making use of Futures markets. This is similar to how it functions in the real world as well - where futures markets are available for various assets. Futures contracts are basically bought when one expects the markets to get bullish and sold when one expects the markets to get bearish - thereby shorting Bitcoins. LedgerX is one of the platforms where you can trade futures markets and short Bitcoin to make profits during a bearish market.
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CFD: Contract for Difference
CFDs are a contract between the buyer and the seller where each agrees to pay the other party and the rise and drop in the price of the currency is settled in cash at the end of the date of contract expiration. This is an increasingly popular way of shorting Bitcoins these days.
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Predictions Market
Predictions market is pretty similar to how betting and gambling work. Basically, you can set up a wager stating that Bitcoin would fall by x% by a certain date. Someone could challenge you on that and the winner gets the final pot based on how accurate they are. This is a relatively new as well as quite a risky concept in the cryptocurrency space. However, platforms such as Augur, Stox and Predictious allow you to make such bets.
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Borrow to Short
This is quite similar to the example we gave in the starting of this article where you borrow a Bitcoin and sell it - and then buy it again when the price falls and return it to the person you borrowed it from. It’s rare to find such people who are willing to let you borrow and return in Bitcoin values - but sometimes, certain brokers could allow you such a deal in exchange for a leverage till you return the currency.
Pros and Cons of Shorting Bitcoin
With an insight on what short selling means and what shorting a Bitcoin is, as well as on how to short Bitcoin, it is also essential to understand the advantages and disadvantages of shorting a Bitcoin. Here’s a detailed look at the pros and cons:
Pros
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Every trader makes a profit while Bitcoin booms. However, to make a profit while the price of Bitcoin is falling requires special skills - shorting being one of them. It helps you make money even during a bearish market.
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A trader can benefit on a currency without ever having to ‘own’ it in actual terms.
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Making use of leverages, one can short for an amount larger than their capital.
Cons
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One of the biggest risk is that of unlimited losses. While your profit per Bitcoin is limited till the price of the currency hits zero - the losses are potentially unlimited as there is no upper limit to where the price can go to! The more Bitcoin gains, the more your losses are.
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Sometimes, brokers can charge overnight financing charges - especially when you go for methods such as borrowing from a broker or CFD. Even Bitcoin Futures contracts come with an additional charge which needs to be considered before you start shorting.
Conclusion
Cryptocurrency investments are a high-risk investment and it is always a tricky situation to be in. Shorting can be an extremely profitable decision in the short-run, particularly when the cryptocurrency markets are going through a slow, bearish phase. However, a wrong decision in shorting could actually lead you into an ‘unlimited’ loss as discussed in the pros and cons. It is a situation where the investor must be aware of when to enter and when to exit the markets.
Shorting isn’t for everyone, and perhaps that’s why not a lot of people are doing it at the moment. However, given appropriate research and experience, shorting is a very beneficial trading activity in such volatile market scenarios.
Also Read: Top 10 Bitcoin Payment Gateways of 2018