How to Short Bitcoin: Everything You Need to Know
Are you looking to short bitcoin? Or wondering what this term even means? Either way, we’ve got you covered! Read all about how to short bitcoin, and why, in our guide.
How to Short Bitcoin – the ABC
Are you new to the crypto world? If so, a lot of the jargon and terms can be a bit confusing. To help you understand shorting bitcoin, let’s first take a step back. We’ll start by explaining crypto trading, in plain English.
Explaining The Jargon
Trading means buying and selling assets with the aim of making a profit. Institutional trading looks at buying and selling stock, shares and currencies. Think Wolf of Wall Street, that kind of thing.
Trading cryptocurrencies means buying and selling digital assets. The tradable assets can differ but the purpose remains the same in both worlds. In conclusion, trading aims at returning a profit.
Trading can have many different strategies. The strategies are usually linked to the trader’s expectations. But when does trading become day trading? This is usually determined by the time that a trader holds an asset. Day trading means buying and selling assets within a very short timeframe. This could be anything from a few seconds to a few hours. It qualifies as long as the asset is traded within the same day. Hence, we say “day trading cryptocurrency”.
Day trading is certainly not the only strategy out there. Many prefer swing trading. This discipline is quite similar to day trading. The main difference being the time period the trader holds an asset. We have prepared a comprehensive guide on swing trading strategies.
What Does Shorting Bitcoin Mean?
Now we’ve laid down the basics of trading, let’s take a look at what “shorting” means.
To put it simply, shorting means benefiting from the price drops of an asset. You borrow bitcoin to sell on the market and later buy back at a lower price. Traders benefit from the difference in market price. So, it is a useful trading tactic for when you’re expecting the price of Bitcoin to decrease.
Shorting Bitcoin In Practice
Let’s take a look at an example that popularized shorting bitcoin. Bitcoin shed over 80% of its value in 2018. This happened because regulations increased steadily and there was a general slowdown in crypto trading. So, bitcoin fell from $17,000 to $3150 in less than a year.
For some bitcoin investors, this was catastrophic. For others, this was a great opportunity to benefit from the decrease in the market price.
Origins of the Name
“Shorting” and “longing” are popular terms in the financial world. But without a bit of background, they can be confusing. Let’s look at the origins of these definitions.
As mentioned before, shorting refers to opening a position that gradually becomes profitable as the price of the underlying asset decreases. The total profitability of the trade is usually proportionate to the total size of the price decrease. The investor hopes for, and benefits from, a drop in the price of the asset.
Long position is on the other end of the spectrum. So, when traders open a long position, they have a straightforward plan. Essentially, they are expecting the price of an asset to increase. So, they purchase more assets. Later on, they sell it for a profit once the current price surpasses the original price.
In conclusion, in a long position, the investor is hoping for the price to rise. An investor in a long position will profit from a rise in price.
The logic behind the naming is in the quantities. So, a “short sell” refers to selling more of something than you have. Your intention is to borrow an asset in order to fulfill your obligation. As you can already guess, “long” is the parallel version of “short”. It doesn’t necessarily hint to excess supply, but it is comparable to the short position.
Why Short Bitcoin?
Shorting can be done for speculative and hedging purposes. Are you wondering what this means? Let’s break it down.
There are many types of traders who short bitcoin. One of the most popular categories are the “skeptics”. That’s right – there are many traders with a bearish view on the market. Some even believe that bitcoin or other cryptos don’t have a bright future. So, they short bitcoin since they speculate that the market will face a downturn in the future. This way, they will make gains from decreased market prices. If you are considering this tactic, there are a few important things to note. For example, it’s important to keep up to date with advances in the market. Cryptocurrency trading is a growing trend and often affects the market prices as well.
However, bearish views are not the only reason for shorting bitcoin. There are actually many traders who believe in bitcoin’s long term potential and still short it. For instance, you already own a considerable amount of bitcoin. But you speculate a temporary decrease on the market. So, you can reduce your risks by selling. And when the price does fall, you cover a portion of the losses from your initial investment with the short position gains.
How to Short Bitcoin in 4 Easy Steps
By now you understand the concept of trading and the reasoning behind shorting bitcoin. So, it’s time to roll up your sleeves. Let’s see how to short bitcoin.
This might sound tedious, but it’s important. Having a solid understanding of the market is essential when shorting bitcoin. If you have already had your first contact with the market, you know that it can be unpredictable. So, you need to be well informed to keep up with the market movements. This means learning about crypto. You can read about crypto market news and the underlying Blockchain technology. Advances in these sectors have affected the price of assets historically. Most likely, they will continue to do that in the future.
In addition to being up to date with crypto market news, you should understand how the trading world functions. There are many tools available to help you navigate the market and identify when prices are about to decrease. You can check out our selection of the best indicators for day trading and best indicators for swing trading to get acquainted with them.
Choose Your Strategy
Let’s get more in depth. There are many varieties for shorting bitcoin. It is up to you to determine your strategy.
Traditional short-selling, as the name suggests, is the most popular way to short bitcoin. This means that you would use a third party for shorting crypto and selling it on the market. The third party in this equation is usually an exchange. As a trader, you borrow funds from the intermediary and sell it on the market. If the price of the asset decreases, you can buy it back at a lower price. So, you can pay back the borrowed funds and keep the profits.
This is commonly known as margin trading. In the trading world, “margin” refers to the assets borrowed from a third party to make an investment. So, buying on margin essentially means borrowing funds to buy assets. Margin accounts give traders access to more capital. This means that traders can leverage their positions. In essence, margin trading strengthens trading positions and traders can realize larger gains on successful trades.
So, let’s take a look at an example. First off, a trader needs to commit a percentage of the total order when making a margin trade. The initial funds that the trader deposits are called margin. Now, the trader will choose a leverage. In other words, the ratio of the borrowed funds.
For instance, a trader commits €25 as a margin. The trader then decides to leverage the trade 3x. So, the trader borrows €50 to buy €75 worth of Bitcoin. Simple, right? Yes, margin trading is not complicated but still requires caution. So, regardless of the results of the trade, you need to return the borrowed funds. In this case, €50 and the fees.
This is a common method for shorting Bitcoin.
Pick an Exchange Platform
If you decide to go for traditional short-selling, you’re going to need an intermediary. Take your time with this, as the choice of exchange can affect the outcome of your trades.
First off, not all crypto exchanges are equipped for shorting bitcoin. Try to look for the ones that offer margin trading. Also, there might be certain restrictions based on your location and other factors. Exchanges margin trading offers differ on a variety of factors. For instance, the maximum leverage that they offer, fees and trading terms.
Are you looking for recommendations on exchanges? CoinMetro offers a margin trading platform with a 5x leverage. Trading indicators and other tools are integrated to the exchange. So, you can pick the indicators you wish to help you with trading.
Manage Your Risks
Trading is a financial activity. Any kind of financial activity has risks. So when discussing how to short bitcoin, it is crucial to learn about managing risks. Especially when you are borrowing funds for shorting bitcoin. Cryptocurrency prices can be volatile, so make sure to take safety precautions when trading.
Knowing the market and having technical analysis skills will not eliminate the risks completely. However, they will give you a much steadier base for margin trading. The basic rules to live by are:
- Understand the terms
- Start out slow
- Know your ABCs
- Use the help of tools.
Curious to know more about these risk-mitigating tips? Check out our guide on What is margin trading to read the long version.
Now that you know how to short bitcoin, why not jump into practice? Head over to CoinMetro to start short selling crypto assets!