The cryptocurrency market is full of opportunities for making considerable profits, but it’s also a very unpredictable environment due to the high volatility of digital currencies, especially that of the market leaders – Bitcoin (BTC) and Ethereum (ETH) – whose price fluctuations heavily influences the rest of the market. The most popular ways for profiting from crypto include crypto trading and holding coins in the hope that their price increases over time.
Trading cryptocurrency requires a lot of practice and market knowledge, such as choosing the right trading strategy, using technical analysis tools on crypto exchanges, and knowing when to buy or sell to take profits.
Shorting crypto is a highly popular crypto trading methodology that doesn’t necessarily involve exchanging different crypto assets. Instead, traders tend to focus on trading a single crypto like Bitcoin at the right time, in order to make fiat currency gains. While shorting crypto isn’t as complex as other popular trading strategies, it’s important to choose the right method for shorting crypto and beware of the possible risks associated with short selling if you want to be successful.
Let’s take a look at the details behind crypto shorting and how you can short sell Bitcoin.
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What Is Shorting Crypto?
Classic crypto trading works by buying a digital currency when the current price is low and selling it when the price goes up. This type of trading is called long trading, and when you enter a market position on a crypto exchange with the hope of selling your crypto at a higher price, you’re entering a long position, which is what most traders do.
However, it’s also possible to make considerable gains by doing the opposite – selling a crypto when its price is high and then buying back in when the price drops, through a short position. This way, traders profit from the price difference.
Many experienced traders borrow crypto from lending protocols or crypto brokerage services on trading platforms and then sell the crypto before or right when it starts falling in price. Then they monitor the price of the traded crypto asset, and when its price drop starts slowing or reversing the price change direction, they immediately buy the same amount of cryptos back at a discount, pay back the lenders and end up with some nice profits.
Short selling isn’t complex by itself, but it does require traders to closely pay attention to the market circumstances regarding the crypto they are shorting. In the case of Bitcoin, traders need to carefully monitor the various factors that might contribute to its price change, such as political turmoil, crypto-related legal regulations, and the general market sentiment, which can be monitored through technical analysis tools and charts.
Experienced short-sellers know exactly when to sell their coins before they start falling in value by recognising price chart patterns that indicate sudden price falls. That’s why shorting isn’t really recommended for crypto beginners, but once you get the hang of it, you can earn considerable amounts of cash in a relatively short period of time.
Bitcoin Shorting Example
Let’s take a look at a classic BTC shorting example in order to visualise how short selling works:
- Let’s say the price of BTC is 40,000 USD per coin, and you take a crypto loan of 1 BTC from a lending protocol or a lending service on a crypto exchange.
- Now, you need to carefully monitor the market and notice the possibility of Bitcoin’s price falling due to unfavourable economic conditions related to inflation on a global scale, and immediately sell that one BTC for 40,000 USD.
- In the following period, the price of Bitcoin starts to fall rapidly, as you’ve predicted, and drops down to 35,000 USD.
- Now it’s time to buy that one Bitcoin back for 35,000 USD and pay back your crypto loan by transferring the BTC back to the broker or lending protocol.
- When you pay back your loan, you’re left with 5,000 US dollars of profits from shorting BTC.
Reasons for Short Selling BTC
There are several reasons why traders decide to short BTC instead of engaging in long trading positions:
- To take advantage of Bitcoin’s volatility.
Bitcoin is a very volatile asset whose price often fluctuates several thousand USD within a few days. These price changes are highly unpredictable, but with the use of advanced technical analysis tools, experienced traders can often anticipate the direction of a BTC price change and gain considerable profits from shorting BTC if the price is about to drop. This is why you shouldn’t engage in crypto shorting if you aren’t familiar with analysing market sentiments and candlestick price charts.
- Seeing Bitcoin as a short-term investment asset.
Traders with bearish sentiments who don’t really believe in cryptocurrencies as a long-term financial asset class that’s here to stay often choose short over long positions because they are always wary of a massive market crash that might send BTC to lows it won’t recover from. These traders don’t hold BTC. Instead, they look at Bitcoin as a short-term profit opportunity.
- To minimise their risks when holding crypto long-term.
Shorting BTC is also used by traders who hold crypto but want to hedge against possible losses of their long trading positions. That’s why some traders short sell BTC while maintaining their riskier long positions open to mitigate possible long trading losses with the gains from short selling.
BTC Shorting Methods
Just as long trading positions have numerous trading methods and strategies, short selling can also be done through a variety of options. Let’s take a look at the most popular ways for short selling Bitcoin.
BTC Margin Trading
The most practical method for engaging in BTC short selling is through margin trading. Most popular cryptocurrency exchanges like KuCoin, Binance, and Kraken support margin trading accounts for experienced traders. This type of trading involves borrowing crypto from Bitcoin exchanges based on collateral crypto deposited through the exchange platform.
In margin trading, users are often allowed to borrow considerably more crypto than their collateral and then engage in trading with those coins. However, once you open a margin trading position, you’ll need to constantly pay margin fees during the duration of the open trading position. That’s why it’s important to carefully estimate when to enter a margin trade because these fees can become quite high when accumulated over time.
When using margin trading to short BTC, you need to remember that although you can multiply your gains since you can borrow more crypto than your collateral, the same goes for potential losses.
Bitcoin Futures Markets
Trading futures is another advanced trading method that can be used to short Bitcoin. To put it simply, a BTC future is a trading deal in which you’re the selling or buying party that agrees to carry out a Bitcoin trade at a certain price once the contract expires. If you’re looking to short BTC with the use of futures, you need to be the selling party. Since futures contracts have their duration, the trading deal gets executed only after the contract expires.
If the market price of Bitcoin is lower than the agreed-upon price in the futures contract, then you’ll profit from acquiring BTC at the lower price and then selling it for the agreed, higher price to the buyer. This is why it’s very important for futures trades to adequately estimate the approximate price movement of a blockchain asset at the time of the futures contract’s expiration. If your price change estimate is wrong and Bitcoin’s value becomes higher than the selling price in the futures contract, you’ll end up paying more for those bitcoins and selling them for a loss.
BTC CFDs
Contracts for differences (CFDs) are similar to futures contracts because they are also a type of speculative agreement where users are betting on the price change of assets. Bitcoin CFDs are different from futures contracts in the sense that users are paid out gains based on BTCs price difference at the time of the CFDs opening and the time of the contract’s closing.
In order to short sell BTC through a CFD, you need to purchase a price decrease contract. Unlike futures, a CFD doesn’t have a fixed expiration date because they are flexible, and CFDs can be traded between brokers. Also, users don’t need to deposit their BTC into a crypto exchange platform when engaging in a CFD agreement, which means there aren’t any crypto custodian fees involved in the contract.
Predictions Markets
Crypto prediction markets work similarly to prediction markets for company stocks. It’s basically a type of gambling because you’re setting up a wager on the price change of BTC during a certain time period. You can choose the expiration date of the event and invest BTC in the desired outcome, which is the price fall of Bitcoin, in case you want to short sell. The more traders take you up on your bet, the more you can earn if your prediction is successful.
Prediction markets are perhaps one of the riskiest shorting methods because you’ll lose all of your invested coins in case your prediction is wrong. That’s why many traders invest a smaller portion of their BTC in prediction markets.
Binary Options
Another method for shorting BTC is through binary options trading. This type of trading is realised through two orders. The call order is used for long positions, while put options are useful for shorting cryptocurrencies. When using binary trading to short BTC, it’s best to utilise an escrow provider to deposit a certain amount of funds in your put order. The initial put order requires users to pay a one-time fee, and after the duration of the put order expires, it’s possible to choose whether to execute the order or not.
If the price of BTC falls compared to its price at the time of your initial put order, then you can short Bitcoin by selling it for the initial price and taking profits. In case the price of Bitcoin rises, you don’t need to execute the order like in the case of futures contracts. You can simply decide not to go through with the deal and only lose the initial put order fee.
Short Selling Your BTC
If you happen to already own some Bitcoin, you can short your own coins on an exchange like Binance. This is a good option if you aren’t in a position to pay back borrowed crypto to a lender with interest because if the price of BTC goes up once you sell it, you don’t need to immediately buy it back in order to return your debt.
When you’re shorting your own digital assets, you can limit how many losses you’re willing to accept, but this can also be tricky because emotions often push traders to go further and pour in more assets trying to retrieve their losses. That’s why fixed margin trading or futures contracts are sometimes less risky since you have a fixed amount of potential losses.
Using ETPs
You can also short BTC by using inverse exchange-traded products (ETPs), which are financial products offered by specialised ETP platforms that enable users to place bets on underlying assets such as BTC through investing in price decrease scenarios. For Bitcoin ETPs, the BetaPro Bitcoin Inverse ETF is a popular shorting option. ETPs are somewhat similar to futures contracts, except that you’re using third-party financial products that represent the market value of the desired crypto asset or another asset such as company stocks.
A Few Ending Words…
As you can see, there are at least seven popular methods for shorting Bitcoin and profiting from the downward change in the price of BTC. Whichever method you choose, it’s important to keep in mind that shorting is extremely risky and if you end up losing a portion of your borrowed crypto due to unfavourable price changes, you’ll need to pay back the lender considerably more than what you borrowed.
In case you’re using some of the shorting methods that don’t require borrowing, you can somewhat limit your potential losses, but in any case, short selling BTC is an extremely high-risk trading activity that requires extensive knowledge regarding market conditions and price fluctuation warning signs.
This is why shorting is only recommended for experienced traders who understand the crypto market and know how to recognise a change in market sentiments.