How To Make Money Shorting Bitcoin

Bitcoin and other leading cryptocurrencies have caused the investment markets to pivot, opening up opportunities for casual traders and large-value investors to participate in a highly volatile, decentralised exchange space.

One of the critical things to understand is that you can make money when assets drop in value – if you know how to short sell.

There are countless variables to consider, but if you believe that Bitcoin will crash at some stage, shorting might be an option, and there are several strategies you might wish to adopt.

What Is Shorting Bitcoin?

Shorting works on the concept that you purchase Bitcoin at a high price and then buy it back for less.

That seems slightly odd since a new trader might assume the only option to make money is to buy a crypto coin at a lower value and sell once the price rises – but shorting works on the opposite principle.

If you want to get into a short position, borrow crypto and sell them via an exchange at today’s price – and buy later, repaying the borrowed capital.

Your profit comes from the difference between the buying and selling prices at the repayment date.

Here’s a quick example:

  • Bitcoin is worth (hypothetically) £50,000 per coin, and we’re shorting ten units.
  • We borrow 10 Bitcoins from the broker at a value of £500,000.
  • The market moves, and Bitcoin drops to £40,000 per coin – making our borrowed value fall to £400,000.
  • We buy the Bitcoin at the newly reduced value and pay back the broker.
  • Our profit is the previous market value of £500,000, less the current price of £400,000, leaving us with a tidy £100,000 gain.

Shorting works when a cryptocurrency is expected to fall in value, whereas a long trade means you anticipate the market price increases.

There are considerable risks in either approach, particularly when talking about Bitcoin, so it’s wise to invest serious time into research and market analysis.

Bitcoin Margin Trading

The easiest option is to use market trading, which you’ll find throughout the crypto exchanges, including FTX, Phemex and Binance Futures.

Margin means that you borrow or leverage capital to support your position, so although you stand to make sizable profits, there is an equal chance of suffering a significant loss.

In essence, margin trades involve borrowing crypto from a broker, using it to execute a trade, and returning the borrowed assets when you settle the transaction.

Shorting On The Futures Market

Like any other investment, Bitcoin has a futures market, whereby traders purchase security with a forward contract.

That contract will specify when and for how much you will sell the security, so taking out a contract means that you’re betting that the security price will increase.

If you think Bitcoin will drop, you can buy contracts that bet on a lower crypto price.

Therefore, you can short futures by agreeing to sell a contract for a lower value – and you can get involved with a reasonably modest investment.

Traders can short Bitcoin futures at several exchanges, including BitMEX and Kraken, or via the Chicago Mercantile Exchange (CME).

Contracts For Differences (CFDs)

CFDs operate on a concept similar to Bitcoin futures, where the trader makes a profit based on value differences from the opening and closing price at the point of settlement.

Buying a CFD is a bet that Bitcoin prices will fall, so if you short sell Bitcoin when it’s trading at £50,000 and close your position when the valuation drops to £45,000, you make a £5,000 profit.

The advantage of CFDs over futures is that the settlement date usually is flexible, so you can choose the optimal time to move. Futures, on the other hand, have a fixed contract end date.

Shorting Bitcoin Through the Prediction Market

The prediction market works like the conventional trading markets, so you can forecast a drop in Bitcoin prices by a particular percentage, creating a bet on the likelihood of the outcome.

If other traders take you up on the wager, you make a profit if your prediction turns out to be correct.

Prediction market trades don’t involve lending or borrowing funds, and you can create a bet on markets such as Polymarket or Augur.

Binary Options Trades

Call and put options are well understood and mean you instigate a put order, often through an escrow service.

The aim is to sell Bitcoin at today’s market value, even if the price falls later. You can trade binary options through several offshore exchanges, but the costs and risks are high.

Traders might go for binary options to limit their potential losses by not selling put options, mitigating the loss only to the cash spent on creating the put order to start.

Binary options trades are short-term Bitcoin shorts with limited risk through the trade contract. For example, you might make a predefined profit or lose the money invested in opening the trade.

Inverse Exchange-Trading To Short Bitcoin

An inverse exchange-traded product bets that the underlying asset’s price will fall. This type of trade is similar to a futures contract and can generate profits alongside other derivatives.

You can use BetaPro Bitcoin Inverse ETF to bet on Bitcoin price drops, although access is restricted in some countries.

Traders can purchase ETFs through several brokers in jurisdictions where the ETF is approved, and you don’t need to open a separate crypto account to take a short position.

Essential Factors To Shorting Bitcoin

We’ve mentioned here the risk and volatility of several of the shorting strategies, and it is vital to recognise that derivatives are based on Bitcoin valuations, with fluctuations creating a widespread impact on your gains or losses.

The lack of regulation and uncertainty about the status of Bitcoin as a trading asset is also an influential factor, which means you can find platforms such as Binance offering huge leverage proportions up to 125 per cent – hence restrictions on exchanges in some countries.

Understanding the types of orders and how they affect your short position is crucial. You can potentially limit your losses if the Bitcoin price moves in a different direction than you anticipated.

One example might be instigating a stop-limit order to prevent larger losses when shorting Bitcoin through derivative trading.

As an investment, Bitcoin is only 13 years old and remains a high-risk option. There is also a world of difference between the security and safety on established trading platforms and more recent prediction markets that can be vulnerable to hacking.

How To Make Money Shorting Bitcoin FAQ

Can I make money shorting Bitcoin?

It is possible to short Bitcoin and profit by analysing price volatility and using derivatives such as Bitcoin options or futures.

There are no guarantees, so any forecasts or positions you take should be backed up with an in-depth risk analysis and market evaluation, as shorting can be high stakes.

How can I short Bitcoin valuations?

We’ve explored here some of the common approaches to short Bitcoin. Margin trading is the most straightforward choice, and futures are typical strategies to bet against the Bitcoin price.

CFDs are also a viable technique, where your profit is the difference between the expected price and the market value.

Is shorting Bitcoin high risk?

All cryptocurrencies are inherently risky because Bitcoin can rise and fall by massive margins in a matter of hours or even minutes.

It isn’t easy to make accurate price movement projections, so shorting Bitcoin is usually a strategy used by experienced traders who make educated guesses.

The lack of a regulatory framework adds to the risk exposure. Even the largest futures trading exchanges are not regulated, so you can do little to recoup your funds or recover your position if things don’t go to plan.

Can investors use leverage to short Bitcoin?

Leverage, or borrowed money, is used on several crypto exchanges or futures trading platforms, allowing traders to borrow capital to bet on Bitcoin price drops.

While this permits larger, more ambitious trades, there is a pitfall in that leverage can magnify losses and gains, so the more leverage you use, the higher the risk you accept.

What are the pros and cons of shorting cryptocurrencies?

The concept of short selling is pretty simple, but the possibility of market conditions changing or not meeting your forecasts is challenging to quantify.

Comprehensive market studies are fundamental to balancing the risks of shorting Bitcoin. Analysis and research are crucial to ensure you make informed bets. Margin interest can eat away at your profits, and you will need a margin account to get started.

Positive aspects of shorting Bitcoin include the opportunity to make excellent profits, investing with a minimal capital amount, and the option to leverage investments if you wish to enhance your potential gains.

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