Are you a newbie in the crypto trading world? In this case, you might have heard about short selling. This is a common trading strategy. But as with many crypto topics, it can be a bit confusing at first. So, let’s have a look at how to short sell Bitcoin.
Introduction to Short Selling Bitcoin
Before we get into detail, you might need a brief introduction. We’ve got you covered. Here are all the terms you need to know before getting started.
Let’s start with trading. Sounds basic, right? However, it is important to understand the core of this practice. Trading means buying and selling assets with the aim of making a profit. Institutional trading looks at buying and selling stock, shares and currencies. Trading cryptocurrencies means buying and selling digital assets.
What Does Shorting Mean?
Now that the concept of trading is clear, we can move on. In order to know how to short sell bitcoin, you need to understand short selling.
To put it simply, shorting means benefiting from the price drops of an asset. So, you borrow bitcoin to sell on the market and later buy back at a lower price. Traders benefit from the difference in market price. It is a useful trading tactic for when you’re expecting the price of Bitcoin to decrease.
How Does Short Selling Work
The best way to explain theory is by using an example. So, let’s have a look at one.
Imagine this: you believe the price of bitcoin will decrease in the next few days or weeks. So, you borrow 3 BTC at, say, €10,000 per coin. That means you have spent €30,000. Now, you sell these coins. After a little while, the price of bitcoin changes. Let’s say it decreases to €8000. You have to pay back the 3 bitcoin you initially borrowed. So, you purchase them at the current market price and pay €24,000 for 3 bitcoin. This means that you have made a profit of €6,000.
Are you looking for more practical examples? Have a look at our extensive guide on how to short bitcoin!
How to Short Sell Bitcoin on an Exchange
The process of shorting bitcoin is starting to become clear, right? But the remaining question is – how to borrow funds when short selling?
There are actually various options available. You can try Contract for Difference (aka CFD), arbitrage or options markets. But the most popular way is shorting via exchange.
Some cryptocurrency exchanges offer an investment method known as margin trading. This means that you can borrow more money than you actually hold in the exchange. So, you can buy more coins and sell them to make more profits than you could make with your original balance.
This type of leverage multiplies your original funds by a defined ratio. But not all crypto exchanges offer this option. So, you have to do your research when looking to short sell via an exchange. There might also 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.
Start Short Selling on an Exchange
CoinMetro offers a margin trading platform with 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.
Margin trading is made quite easy with CoinMetro. You simply place an order to buy or sell a particular asset against another. When the order is filled, an open position is created. This has a floating profit or loss (P/L) that automatically updates as market prices change.
Need a more detailed guide? Have a look at this step by step manual.
- Select the pair you wish to trade. This can be done by clicking a row in the Pairs panel.
- Complete the order form. You can choose between the Compact and Advanced order forms. The Compact order form lets you specify order type, price and trade size. The Advanced order form also has features like Take Profit, Stop Loss and Time in Force.
- Click the large Buy or Sell button at the bottom of the order form. And you’re good to go!
How To Short Sell Bitcoin Responsibly
As you might understand, short selling involves some risks. Cryptocurrency prices can be volatile, so it’s important to take safety precautions when trading. Short selling usually means borrowing funds during trades. Due to this, having a plan is especially important.
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.
Now that you know how to short sell bitcoin, why not jump into practice? Head over to our crypto exchange to start short selling crypto assets!