News
7 Ways to Short Sell Bitcoin
For investors who believe in it Bitcoin (Currency Exchange) is likely to decrease at some point in the future, short the currency could be a good option. The number of venues and ways you can short Bitcoin has multiplied with the cryptocurrency’s growing attention in mainstream finance. Here are some ways you can short Bitcoin.
Key points
- There are many investment options available for those looking to short Bitcoin
- Short selling Bitcoin means borrowing and selling Bitcoin, hoping that prices will fall so you can buy Bitcoin at a lower price to repay the loan and make a profit.
- Derivatives such as options or futures can give you short exposure, as can margin facilities available on some cryptocurrency exchanges.
- The price of Bitcoin is volatile and subject to sudden increases or decreases. Short selling is risky for any asset, but it can be especially dangerous in unregulated cryptocurrency markets.
1. Margin Trading
One of the easiest ways to short Bitcoin is through a cryptocurrency margin trading platform. Many exchanges and brokerage firms allow this type of trading, with margin trades allowing investors to “borrow” money from a broker to make a transaction. It is important to remember that margin involves leverage or borrowed money, which can increase profits or exacerbate losses. Many Bitcoin exchanges allow margin trading at this stage, through which The kraken AND Binance are some of the most popular options.
2. Futures market
Bitcoin, like other assets, has a futures market. In a futures trade, a buyer agrees to purchase a security with a contract, which specifies when and at what price the security will be sold. If you buy a futures contract, you are betting that the price of the stock will rise; this ensures that you can get a good deal later. If you sell a futures contract, this suggests a bearish mindset and a prediction that the price of Bitcoin will decline. In this context, you can sell Bitcoin by buying contracts that bet on a lower price.
Bitcoin futures trading took off around the cryptocurrency price rally in late 2017. It is now available on a wide variety of platforms. You can short Bitcoin futures on Chicago Mercantile Exchange (CME), the world’s largest derivatives trading platform, and on cryptocurrency exchanges. Bitcoin futures can be purchased or traded on popular exchanges such as Kraken or BitMEX and can also be found at popular brokers such as eToro AND TD Ameritrade.
You can also trade perpetual Bitcoin futures on platforms like BiteMEX if you have access to it. Perpetual futures They have no closing dates, allowing traders to set and forget positions or not have to worry about rolling them over.
Coinbase began offering Nano Bitcoin Futures trading on June 27, 2022. Contract sizes are 1/100 of a Bitcoin, have a tick value of $0.05 per contract, and minimum price increments of $5.
3. Binary Options Trading
Call AND put options They also allow traders to short Bitcoin. If you want to short the currency, you would execute a sell order, probably with an escrow service. A put means you would try to sell the currency at today’s price, even if the price drops later.
Binary options they are available through several offshore exchanges, but the costs (and risks) are high. One of the advantages of using binary options trading over futures is that you can limit your losses by choosing not to sell your put options. Therefore, your losses are limited to the price paid for the put options. Popular places for options trading are Deribit and OKEx.
4. Prediction markets
Prediction markets, where you bet on the outcome of events, are another way to consider selling Bitcoin. Prediction Markets in cryptocurrencies are similar to those in traditional markets. Investors can create an event to place a bet based on the outcome.
You could then predict that Bitcoin will drop by a certain margin or percentage, and if someone takes your bet, you could profit if that were to happen. The most popular cryptocurrency prediction markets are GnosisDAO and Polymarket.
5. Bitcoin Assets Sold Short
While this strategy may not appeal to all investors, those with the stomach can profit if their bet against the price of Bitcoin is successful. Sell the tokens at a price you are comfortable with, wait until the price drops, then buy the tokens again. Of course, if the price doesn’t adjust as expected, you could lose money or Bitcoin in the process.
Short selling Bitcoin also involves high costs and risks. For example, you may have to pay custody OR Bitcoin Wallet fees to hold the cryptocurrency until the transaction occurs. You will also have to bear the risk of Bitcoin price volatility. If the price rises (instead of falling, as you hoped), you could end up with significant losses. Some exchanges also offer leverage to conduct such transactions. Again, the downside to using leverage is that it could magnify gains or losses.
6. Using CFDs on Bitcoin
A contract for differences (CFD) is a financial strategy that pays money based on the price differences between the opening and closing prices for settlement. Bitcoin CFDs are similar to Bitcoin futures in that they are essentially bets on the price of the cryptocurrency. When you buy a CFD in the expectation that prices will fall, you are shorting Bitcoin.
A contract for difference is settled in fiat currency, so you don’t have to worry about owning or storing Bitcoin.
CFDs have a more flexible settlement duration than Bitcoin futures, which have a pre-determined duration settlement dates. Additionally, in some Bitcoin CFD markets, traders can enter into a contract based on the performance of Bitcoin or its performance relative to fiat money or another cryptocurrency.
7. Use of inverse exchange-traded products
Inverse Exchange Traded Products are bets on the decline in the price of an underlying asset. They are similar to futures contracts and are used in conjunction with other derivatives to produce returns. Until January 2024, the only exchange-traded product available to U.S. residents was ProShares’ Short Bitcoin Strategy ETF (BITI). That month, the Securities and Exchange Commission approved 11 Spot Bitcoin ETPs that can be used to sell Bitcoin.
Investors outside the United States can invest in Canada’s BetaPro Bitcoin Inverse ETF (BITI) or the European Union’s 21Shares Short Bitcoin ETP.
Factors to consider when shorting Bitcoin
As with any cryptocurrency strategy, shorting Bitcoin carries enormous risk. There are several aspects you should consider when shorting Bitcoin.
The price of Bitcoin is volatile
Most ways to short Bitcoin depend on derivatives. These derivatives are based on pricing; Cryptocurrency price fluctuations have a domino effect on investors’ gains and losses.
For example, Bitcoin futures mimic spot price movements, which means they cannot be used as an effective hedge against an actual Bitcoin investment. Likewise, Bitcoin options trading can multiply losses due to price volatility of the underlying cryptocurrency.
Bitcoin, as an asset, is risky
Price is just one of several risks you will have to evaluate when shorting cryptocurrency. Compared to other more established assets, Bitcoin is nascent. It has only existed since 2009. Therefore, there is not enough data or information for investors to make an informed decision on its functioning or its viability as an asset.
For example, several issues related to Bitcoin forks they are still unsolved. While established platforms like CME are more secure and enforceable for Bitcoin derivatives, new platforms may start out “clumsily” and be more susceptible to hacks.
The regulatory status for Bitcoin is still developing
Regulations across geographies are still being developed and implemented. The United States has made great strides, as several major court cases have been concluded and several Bitcoin investment tools have been approved. The European Union has published its cryptocurrency markets legislation, which guides the bloc’s members in their cryptocurrency operations.
There are several leading Bitcoin trading platforms, such as Deribit and OKEx, that are not available to US investors due to regulatory compliance issues. This poses problems for those in the US who want to trade certain instruments or derivatives offered on exchanges that are not regulated by US authorities because if they trade there, they are not protected.
Knowledge of order types is a must
Before taking a short position in Bitcoin, you should brush up on your knowledge of different order types. They can help limit losses if the price trajectory does not go in the direction you initially bet, for example, using stop-limit orders while trading derivatives can reduce losses.
Is it possible to short sell Bitcoin?
Yes. You can short the volatile price of Bitcoin by betting against it using derivatives such as futures and options. However, it is essential to consider the risks associated with shorting, which are many.
What are some of the most common ways to shorten Bitcoin?
The most common way to short Bitcoin is to short its derivatives such as futures and options. For example, you can use put options to bet against cryptocurrency prices. Contract for difference (CFD), where you pocket the difference between the actual price of an asset and the expected price, is another way to reduce Bitcoin prices. Prediction markets are another avenue to sell Bitcoin.
What are the risks of shorting Bitcoin?
There are two main risks in shorting Bitcoin. The first is price risk. The price volatility of the underlying asset can make it difficult to accurately predict the price movement of the underlying asset. The second main risk is regulatory risk or lack thereof. Some of the largest cryptocurrency futures trading venues are unregulated. This means investors have fewer options for recourse if something goes wrong with their trade.
Can I short Bitcoin using leverage?
Many cryptocurrency exchanges like Binance and futures trading platforms allow the use of leverage, or borrowed money, to bet on a decline in the price of Bitcoin. However, keep in mind that leverage can magnify gains and losses, so the risk when using leverage is proportionately greater.
The bottom line
Bitcoin shorting is a viable option for traders who are comfortable with risk. There are several exchange-traded products and strategies available for Bitcoin shorting. Before you get started, it is helpful to learn the order types and practice your strategies.
The comments, opinions and analyses expressed on Investopedia are for informational purposes only. Read our warranty and exclusion of liability for more information. As of this writing, the author owns BTC and XRP.