As Bitcoin has proven to be the most preferred cryptocurrency among traders and investors, it is no wonder that the price is continuously moving. Being one of the most volatile cryptos, BTCs’ price keeps moving up and down.
However, experienced investors know they can profit from this volatility. Do you want to know how to profit from the falling prices by simply shorting Bitcoin? If your answer is yes, then keep on reading.
What Does it Mean to ‘Short’?
To ‘Short’ refers to when a trader sells security first with the planning of repurchasing it later at a lower value. In other words, investors and traders who want to short a stock or Bitcoin want the price to go down. Also, short is known as a short position. It happens when a trader believes that the cost of that security will face a downfall in the future. Currently, there are two types of short:
- Naked – when a trader sells a security without having possession of it
- Covered – when a trader borrows the security from the loan department and pays a borrow-rate.
Moreover, in the futures or foreign exchange markets, short positions can be created at any time. But let’s focus on how you can short Bitcoin in 2019.
How to Short Bitcoin?
When it comes to Bitcoin, short-selling is an investment method that can help you get to benefit when the price falls. And if you want to short Bitcoin, you have to contact a trading agency or place a short sell order. Generally, by shorting Bitcoin, you are borrowing the asset. Moreover, you can sell it at its current price. As you have borrowed the asset from either a company or a person, you have to purchase the Bitcoins to pay back with an equal number of Bitcoins.
Let’s say that at the moment you want to short sell 20 Bitcoins the price is $3,000. As you want to short sell 20 Bitcoins, you will ultimately have to “cover” those 20 Bitcoins. In case the price has decreased, it would be less expensive to purchase those 20 Bitcoins back. On the other hand, if the price of Bitcoin has increased, you will have to pay much more for those 20 Bitcoins. It’s confusing, isn’t it? Let’s take a look at an example.
- You short sell 20 Bitcoins when the price is $3,000
- You sell them for $60,000
- The price of Bitcoin drops to $2,000
- You buy 20 Bitcoins to give back to the agency you borrowed them from (20 x $2,000 = $40,000)
- Your total profit is $60,000 – $40,000= $20,000
Moreover, when the short-selling process has started, the person who loaned the Bitcoins to you can recall the assets at any given time. Also, you will be given short notice before that. So, read any rules, regulations, or guidelines carefully to avoid any problem.
Exchanges That Allow Traders to Short Sell Bitcoin
Do you want to know how to short sell Bitcoin? Well, we will show you how to short Bitcoin using eTorro in a step-by-step guide.
Step 1: Sign up to eToro unless you already have an account.
Step 2: Make sure your account is verified. If your account is not confirmed, then follow the instructions on how to verify it.
Step 3: Go to the BTC/USD trading instrument and click on “Trade.”
Step 4: Choose “Sell” and select the amount to short sell.
Furthermore, there is another way. You can Short Sell CFDs, which stands for Contract for Difference. In this case, you won’t be borrowing the Bitcoins. Instead, you agree just to pay the difference. Further, eTorro also offers a cryptocurrency CFD service, which allows you to short sell Bitcoin. Other exchanges that enable traders to short sell Bitcoin are Bitmex, Bitfinex, and Kraken.
When Should You Short Sell?
Simply said, shorting Bitcoin is a trading process against a long-term uptrend. However, the longer the time frame, the riskier it is. Of course, the maximum potential profit is limited to when the Bitcoin price falls to 0. Meanwhile, buyers simply have unlimited opportunities when it comes to profits.
However, every experienced investor knows that bullish moves take time to develop. Meanwhile, bearish moves more likely to be relatively short and sharp. It is tough to short the top of a big bull run.
Past events that triggered major sell-offs
- Failure of major exchanges
- Hostile regulatory action in significant countries
- Well-known developers quitting the Bitcoin development team
- Heightened hard fork risks
So, should you short Bitcoin? As we mentioned earlier, shorting Bitcoin is risky as the price is volatile. However, despite the volatility and the risk, many investors have earned money by shorting Bitcoin. Our suggestion is to think carefully. If you are a beginner, you should consider other strategies.
Frankly, the high risk involved in Bitcoin shorting is not for inexperienced investors. Also, if you want to short sell Bitcoin, make sure you know everything that is happening with the cryptocurrency. Also, stay up-to-date with current related events and news related to the market.