Advanced
Rates for cryptocurrency can change many times per day. The two main behavior patterns of cryptocurrency traders are the same as fiat exchanges: Some purchase coins at a low cost (as most traders do), and others buy coins during peak periods. It is much easier to buy a currency at low prices and wait for it’s growth. The coins have never seen an increase or fall in value, so cryptocurrency traders need to be able short them.
How to Shorten Bitcoin?
Short-selling is a trading practice that lets you benefit from a drop in an asset’s price. To put it simply, it involves selling an asset you don’t own and then buying it back later. It works like this:
- You take out a loan to purchase an asset
- It can be sold
- You can repurchase the item if its price drops
Obviously, that’s not all there is to it. Since you’re borrowing the asset you’re selling, its original owner can request you to return it — not personally (since all this is done via a third-party service like a broker or an exchange), but automatically — and then you will be forced to buy the asset back at the current market price. Learn more in the Risks of Shorting Bitcoin section.
What does Shorting in Crypto Mean?
In the context of cryptocurrency, shorting refers to placing bets against the cryptocurrency’s value. You borrow the cryptocurrency from another person, sell it at the current price and then hope to purchase it back at a lower cost later on to repay the loan.
Imagine a scenario in which you think that Bitcoin price is going to drop soon, either because you’ve done your own research or have read somebody else’s (remember to never blindly follow other people’s financial advice!). To make money from this knowledge, you can borrow 1 BTC and sell it on an exchange for $60,000. A week later, just as you predicted, Bitcoin drops to $40,000 — and you promptly buy back that 1 BTC you borrowed, thus getting $20,000 of profit.
The Risques of Shorting Bitcoin
If everything goes according the plan, you can buy back assets that you have borrowed at a lower rate and make a large profit. Unfortunately, things rarely go according to plan — and especially so in a market as volatile as crypto.
Shorting has the biggest drawback: you have no limits on how much you can lose. If you want to short Bitcoin, you must open a trade. Usually, you choose when to close that position (buy back the asset you borrowed) by yourself, but that’s not always the case. Your broker or exchange will buy back any assets that you have borrowed with funds from your account if a margin call has been issued.
However, sometimes that is not possible — the market may not be open, or the demand may far outweigh the supply — and in such cases, the buyback price can even exceed your account balance, making you indebted to the exchange. This happens rarely. However, you should always be careful and closely monitor the market for the asset that interests you.
Where can I shorten crypto?
Well, now you’re probably wondering: How do you short Bitcoin? Don’t worry, it’s really easy! A wide range of trading platforms were created as crypto gained popularity. Here are the best platforms to shorten Bitcoin.
- Changelly PRO: Great for Beginners
- Binance: great for experts
5 ways to shorten Bitcoin
The way you short Bitcoin depends on many factors. These include your risk aversion and available funds. These are the five main ways you can shorten cryptocurrency.
Margin trading
This is the best way to shorten Bitcoin.
Changelly PRO makes it easy to open a margin account. To open a margin account on Changelly PRO, you just need to enable 2-factor authentication. That’s it!
Margin trading lets you use leverage. This means that you can borrow money from the exchange for more than you have put in to your account. While this opens up doors for higher profits, it is naturally riskier, too — your position may close sooner than you expected if you’re engaging in leveraged shorting.
Learn more about margin trading on Changelly PRO.
Futures Market
Bitcoin, like all assets, has a futures marketplace. In a futures trade, you basically agree to buy an asset — in our case, BTC — on the condition that it will be sold later at a predetermined price. This is known as a futures agreement.
You can also sell futures contract. In that case, unlike when buying them, you will be able to benefit from the asset’s price dropping.
Learn more about Bitcoin futures markets here.
Binary Options Trading
Binary options trading allows you to bet on “yes or no” scenarios. The financial product gives buyers the opportunity to opt out of the contract, but not the obligation. You basically bet on whether an asset’s price will go up or down. You can short sell crypto by using this method. To do so, you must purchase put options.
Binary options trading allows for greater flexibility and offers higher leverage than usual. We would advise against engaging in it unless you’re an expert trader.
Prediction Markets
Prediction markets look a lot like sports betting agencies. Such platforms haven’t been around in the crypto industry for a long time, yet they present a good way to short Bitcoin. They allow you to make a wager on a specific outcome, such as “Bitcoin is going to fall by 10% next week.” If somebody takes you up on the bet, you can make quite a hefty profit.
Short Selling Bitcoin Assets
You can short-sell Bitcoin directly if you have sufficient funds. All you need to do is sell BTC when the price is high and then buy back when it’s low. This method of short selling Bitcoin is relatively beginner-friendly, as you don’t need to learn how to use trading platforms to utilize it. It is also a lot less risky since you can’t lose more than you own. It is also less profitable. The risk is always greater than the reward.
Things to Be Watchful of When Shorting Cryptocurrencies
Short selling is just like any other trading practice. You need to be cautious and well-informed. Thoroughly research all assets you’re planning to short and only ever spend money you can afford to lose.
Risk
Shorting is high-risk and high-reward. Because your profit margin is small, your losses are large, shorting is one of most risky ways to make a living.
Besides what we’ve already mentioned, another risk you should look out for is potential regulations. In the past, short-selling bans were issued. This forced traders to take huge losses.
Short selling is also not fit for traders who don’t know how to stop themselves. If you don’t know how to accept your losses, shorting is not for you.
Volatility
It’s no secret that the crypto market is highly volatile, which presents obvious challenges when short selling: the price of Bitcoin can change quite drastically at any point. Some people use complex analysis to predict price movements, but even the most well-researched predictions aren’t correct 100% of the time.
Short selling can be risky because of the unpredictable nature of market prices. However, there’s a way to safeguard yourself against extreme market volatility: stop-loss orders.
A stop loss order is an order made by a broker or exchange and will allow the asset to be sold/purchased once it reaches a specified point.
Conclusion
If you’re confident in your market research, short selling Bitcoin can be a profitable way to make a profit. Besides the ones we’ve mentioned here, there are other ways to short sell Bitcoin, like spread betting or CFDs trading. If you’re interested in shorting cryptocurrency, we encourage you to start with something relatively easy and not rush straight into complex strategies.
Always do your research and only invest what you can afford. And if you need a reliable launchpad to kickstart your trading journey or want to try out some of the things we’ve mentioned here, check out Changelly PRO, our full-featured yet easy-to-use trading platform.
Bitcoin short selling:
Do you lose money if Bitcoin goes down?
No, because of the nature of shorting, you will actually make a profit if Bitcoin’s price drops.
Is short selling ethical?
To a non-trader, short selling may seem unethical and even downright evil — after all, you’re basically betting on a business or an underlying asset doing badly. Since so many people are passionate about Bitcoin as a technology, they may see betting against the cryptocurrency’s success as something negative.
However, this couldn’t be further from the truth. To a certain degree, short sellers can be very beneficial to any market. Short sellers not only provide liquidity, but they also help to prevent asset prices inflated too much. Of course, some unethical short sellers use strategies like “short and distort,” but it’s not that different from people who use “pump-and-dump” schemes in traditional trading. At the end of the day, it’s not the activity itself that’s unethical — it’s the (few and far between) people who indulge in unethical practices.
In addition to what we’ve already said, short sellers can also help expose financial fraud since one has to do a lot of research to short sell successfully. Short sellers are more likely to notice errors and inflated numbers. in financial reports.
What happens if a short-seller defaults?
In most cases, that will never happen — your position will be closed once the price of an asset goes up and a margin call is issued. However, if the price rises significantly while the markets are closed, and the loss you incur can’t be covered by your account balance, the exchange/broker will have to chip in and assist you with closing your position. You can sue them to recover the money.
Is there a way for Dogecoin to be shortened?
Yes, you can shorten any cryptocurrency, including Dogecoin, Ethereum and many other. It all depends upon which trading pairs are available on the exchange you choose.
Is short selling bad for you?
It is dangerous to short-sell crypto. Whether or not it is bad depends on the individual’s approach. A person who fully understands the risks of short selling crypto can reap the benefits of the rapid appreciation in crypto prices. If a person doesn’t understand these risks or fails protect their investments, short selling can have disastrous consequences.
How do you determine if a stock was being shorted or not?
Examine the ratio of long/short to determine if the stock is being traded short. This is also a great way to look out for short squeezes — a situation where the number of short positions for an asset significantly prevails. This is often a sign that there will be price spikes.
Can you keep a position for a long time?
Well, yes. But, in real life, no one can hold a short position forever.
Two reasons you might close your position are: 1) You close it when the market value of the asset that you borrowed drops enough to make you a profit, or 2) It gets closed automatically when the price has risen. Of course, technically, the price may remain the same, but it’s more than highly unlikely. You can also lose access to trading accounts or forget you ever opened a trade.
Disclaimer: This article does not contain any investment or financial advice. The information provided in this article is the author’s opinion only and should not be considered as offering trading or investing recommendations. This information is provided without warranty as to its accuracy, reliability, and completeness. The volatility of the cryptocurrency market is high and there are occasional arbitrary moves. Before making an investment, any investor, trader or regular crypto user should investigate multiple perspectives and learn all applicable regulations.