Shorting Bitcoin (BTCUSD) could be a wise move for investors who think the price of the cryptocurrency will eventually drop. The rising attention that Bitcoin is receiving from mainstream finance has led to an increase in the venues and Seven methods available for shorting the cryptocurrency. Here are a few methods you can use to short Bitcoin.
ESSENTIAL NOTES
There are plenty of investment choices accessible for anyone who want to short Bitcoin Shorting is the practice of borrowing and selling bitcoin in the hopes that prices will drop and you will be able to purchase bitcoin at a reduced cost to cover your costs and make a profit.
- You may have short exposure through derivatives like futures and options, as well as through margin accounts offered by some cryptocurrency exchanges.
- Bitcoin’s price is erratic and prone to abrupt rises and falls. Any asset can be risky when selling short, but unregulated cryptocurrency markets can be especially risky.
1. Trading on margin
Via a cryptocurrency margin trading platform, shorting Bitcoin is among the simplest methods available. This kind of trading is permitted by many exchanges and brokerages; margin trades enable investors to “borrow” funds from a broker in order to execute a deal amortization. It’s critical to keep in mind that margin calls for leverage or borrowed funds, which has the potential to boost gains or exacerbate losses. At this point, a few of Bitcoin exchanges provide margin trading; Kraken and Binance are two well-liked choices.
2. The Futures Industry
Similar to other assets, bitcoin has a market for futures. A buyer agrees to acquire an asset via a contract in a futures deal, which details the security’s sale date and price. Purchasing a futures contract guarantees that you can get a good bargain on the security later on since you are wagering that its price will increase. Selling a futures contract indicates a pessimistic outlook and a forecast of a drop in the price of Bitcoin. In this case, buying contracts that wager on a lower price allows you to short Bitcoin.
Trading in bitcoin futures really took off during the peak of the cryptocurrency market towards the end of 2017. It can now be found on many other platforms. The largest derivatives trading platform in the world, the Chicago Mercantile Exchange (CME), and cryptocurrency exchanges allow you to short Bitcoin futures. Popular brokerages like eToro and TD Ameritrade as well as exchanges like Kraken and BitMEX provide bitcoin futures for purchase or trading.
If you have access to them, you can also trade perpetual Bitcoin futures on exchanges like BitMEX. Because perpetual futures have no expiration dates, traders can establish and forget positions or not bother about rolling them.
3. Trading Binary Options
Trading Bitcoin short is also possible with call and put options. To short the currency, you would place a put order, most likely using an escrow provider. If you buy a put, you would be trying to sell the currency even if the price declines later.
Many offshore exchanges provide binary options, but the expenses and hazards are substantial. The ability to control your losses by opting not to sell your put options is one benefit of binary options trading over futures. As a result, the maximum amount you may lose is what you paid for the put options. Deribit and OKEx are well-liked exchanges for trading options.
4. Forecasting Marketplaces
An further option to think about shorting Bitcoin is to use prediction markets, which allow you to wager on the course of events. Cryptocurrency prediction markets resemble traditional markets. Investors have the ability to produce an event and place bets based on the results.
As a result, you could forecast that Bitcoin will drop by a specific amount or percentage. If someone were to take you up on this wager, you would get money if the prediction came to occur. GnosisDAO and Polymarket are well-known cryptocurrency prediction markets.
5. Selling Bitcoin Assets Short
Even though not every investor will find success with this approach, those who have the stomach for it stand to earn if their wager against Bitcoin pricing is successful. Once the price of the tokens decreases, you should purchase new tokens after selling them off at a profit that suits you. Of course, you run the risk of losing money or Bitcoin if the price does not change as you had anticipated.
Selling something quickly Bitcoin entails significant risks and expenses. For instance, in order to keep the bitcoin until the exchange happens, you could have to pay custody or Bitcoin wallet costs. You will also be exposed to the risk of fluctuations in the price of Bitcoin. Should the price rise instead of falling as you had intended, you may suffer large losses. A few exchanges provide leverage as well for making these kinds of trades. Leverage once more has the drawback of potentially amplifying gains or losses.
6. Using CFDs on Bitcoin
A financial instrument known as a contract for differences (CFD) distributes funds according to the variations in the settlement prices between the open and closing prices. In essence, Bitcoin CFDs and Bitcoin futures are wagers on the price of cryptocurrencies. You are shorting Bitcoin when you buy a CFD expecting prices to drop.
7. Employing Reverse Exchange-Traded Items
Exchange-traded instruments with inverse pricing are wagers on a decrease in the value of the underlying asset. They work in tandem with other derivatives to generate returns and are comparable to futures contracts. ProShares’ Short Bitcoin Strategy ETF (BITI) was the only exchange-traded instrument that was accessible to residents of the United States until January 2024. Eleven Spot Bitcoin ETPs, which are useful for shorting Bitcoin, were approved by the Securities and Exchange Commission that same month.
The BetaPro Bitcoin Inverse ETF (BITI) from Canada and the 21Shares Short Bitcoin ETP from the European Union are options for investors residing outside of the United States.
Things to Take Into Account When Shorting Bitcoin
Like any cryptocurrency-related tactic, shorting Bitcoin has a high risk. When shorting Bitcoin, you need take a few things into account.
The Price of Bitcoin Is erratic
The majority of Bitcoin shorting strategies rely on derivatives. Since the basis of these derivatives is pricing, changes in the value of cryptocurrencies have a cascading effect on the profits and losses of investors.
For instance, Bitcoin futures are unable to serve as a useful hedge against an actual Bitcoin investment because they replicate spot price fluctuations. Similar to this, the price volatility of the underlying cryptocurrency can magnify losses in options trading on Bitcoin.
Bitcoin Is a Dangerous Asset
When shorting a cryptocurrency, you will need to consider a number of risks, including price. Bitcoin is still in its infancy when compared to other, more established assets. It has only existed since 2009. Because of this, investors are unable to make an informed choice regarding its viability as an asset or how it operates.
For instance, there are still a number of unsolved problems regarding the Bitcoin forks.While new platforms may initially be “clunky” and more vulnerable to hackers, more established systems, such as CME, are safer and guarantee execution for Bitcoin derivatives.
Bitcoin’s Legal Situation Is Currently Evolving
Regulations are continually being established and put into effect globally. The United States has made progress, with the resolution of numerous significant legal issues and the approval of multiple Bitcoin investment products. The Markets in Crypto Assets regulation published by the European Union serves as a guidance for members of the bloc when it comes to cryptocurrency transactions.
American investors are unable to access a number of popular Bitcoin trading sites, including Deribit and OKEx, because of problems with regulatory compliance. Because they are not protected when trading on these platforms, Americans who want to trade certain securities or derivatives issued by non-US authorities may find this problematic.
Understanding Order Types Is Essential
You should review the various order types before taking on a short position in Bitcoin. If the price trajectory does not follow your initial wager, they can assist limit losses. For instance, utilizing stop-limit orders when trading derivatives can help you reduce your losses.
Can Someone Short Bitcoin?
Indeed. By using derivatives like futures and options to wager against Bitcoin, you can short its erratic price. Nonetheless, it is vital to take into account the numerous hazards connected to shorting.
Which Are Among the Most Popular Methods for Shorting Bitcoin?
The most popular method of shorting bitcoin is through shorting its derivatives, such as options and futures. Put options, for instance, can be used to wager against bitcoin prices. Another strategy to short Bitcoin pricing is to use a contract for differences (CFD), in which you keep the difference between the asset’s real price and your predicted price. An additional option for shorting Bitcoin is to use prediction markets.
What Kind of Hazards Come With Shorting Bitcoin?
Shorting Bitcoin carries two primary risks. Price risk comes first. Accurately predicting the price movement of the underlying asset might be challenging due to its price volatility. The absence of regulatory risk is the second major risk. A number of the largest bitcoin futures trading platforms are unregulated. This implies that in the event that a trade goes awry, investors will have fewer avenues for remedy.
Can I Leverage to Short Bitcoin?Leverage, or borrowing money, is permitted on several cryptocurrency exchanges such as Binance and futures trading platforms in order to make wagers on a decline in the price of Bitcoin. But keep in mind that using leverage carries a correspondingly higher risk because it can amplify both gains and losses.
The Final Word
For traders who don’t mind taking risks, shorting Bitcoin is a good alternative. Several exchange-traded products and strategies are available for shorting Bitcoin. It helps to familiarize yourself with order kinds and hone your tactics before you start.
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