For investors who believe that Bitcoin (BTCUSD) is likely to crash at some point in the future, shorting the currency might be a good option. The number of venues and ways in which you can short Bitcoin has multiplied with the cryptocurrency's increasing spotlight in mainstream finance. Here are some ways that you can go about shorting Bitcoin.
- Many investing options are available for those looking to short Bitcoin—i.e., to earn a profit by betting against its price.
- Derivatives such as options or futures can give you short exposure, as can margin facilities available on certain crypto exchanges.
- The price of Bitcoin is volatile and prone to sudden increases or decreases. Selling short is risky in any asset, but it can be particularly dangerous in unregulated crypto markets.
1. Margin Trading
One of the easiest ways to short Bitcoin is through a cryptocurrency margin trading platform. Many exchanges and brokerages allow this type of trading, with margin trades allowing for investors to "borrow" money from a broker in order to make a trade. It's important to remember that margin involves leverage or borrowed money, which can increase profits or exacerbates losses. Many Bitcoin exchanges allow margin trading at this stage, through which Kraken and Binance are some popular options.
2. Futures Market
Bitcoin, like other assets, has a futures market. In a futures trade, a buyer agrees to purchase a security with a contract, which specifies when and at what price the security will be sold. If you buy a futures contract, you are betting that the price of the security will rise; this ensures that you can get a good deal on it later. If you sell a futures contract, it suggests a bearish mindset and a prediction that Bitcoin will decline in price. In this context, you can short Bitcoin by purchasing contracts that bet on a lower price for the cryptocurrency.
Bitcoin futures trading took off around the run-up in cryptocurrency prices at the end of 2017. It is available on a wide variety of platforms now. You can short Bitcoin futures at the Chicago Mercantile Exchange (CME), the world's biggest derivatives trading platform, and on cryptocurrency exchanges. Bitcoin futures can be purchased or traded on popular exchanges like Kraken or BitMEX and can also be found at popular brokerages such as eToro and TD Ameritrade.
You can also trade perpetual Bitcoin futures on platforms like BitMEX if you have access to them. Perpetual futures do not have closing dates, allowing traders to set and forget positions or not have to worry about rolling them.
Coinbase began offering Nano Bitcoin Futures trading on June 27, 2022. The contract sizes are 1/100th of a Bitcoin, have a tick value of $.05 per contract, and minimum price increments of $5.
3. Binary Options Trading
Call and put options also enable traders to short Bitcoin. If you wish to short the currency, you'd execute a put order, probably with an escrow service. This means you would be aiming to be able to sell the currency at today's price, even if the price drops later on.
Binary options are available through several offshore exchanges, but the costs (and risks) are high. One of the advantages of using binary options trading over futures is that you can limit your losses by choosing not to sell your put options. Thus, your losses are limited to the price you paid for the put options. Popular venues for trading options are Deribit and OKEx.
4. Prediction Markets
Prediction markets—where you place bets on the outcome of events—are another way to consider shorting Bitcoin. Prediction markets in crypto are similar to those in mainstream markets. Investors can create an event to make a wager based on the outcome.
You could, therefore, predict that Bitcoin would decline by a certain margin or percentage, and if anyone takes you up on the bet, you'd stand to profit if it comes to pass. Popular crypto prediction markets are Augur, GnosisDAO, and Polymarket.
5. Short-Selling Bitcoin Assets
Though this strategy might not appeal to all investors, those with the stomach for it can reap gains if their bet against Bitcoin pricing succeeds. Sell off tokens at a price you are comfortable with, wait until the price drops, and then buy tokens again. Of course, if the price does not adjust as you expect, you could either lose money or Bitcoin in the process.
Short-selling Bitcoin also incurs high costs and risks. For example, you might need to pay custody or Bitcoin wallet fees to store the cryptocurrency until the trade occurs. You will also have to bear the risk of Bitcoin's price volatility. If the price goes up (instead of down, as you'd hoped), you could end up with significant losses. Certain exchanges also offer leverage for conducting such trades. Again, the downside to using leverage is that it could magnify gains or losses.
6. Using Bitcoin CFDs
A contract for differences (CFD) is a financial strategy that pays out money based on the price differences between the open and closing prices for settlement. Bitcoin CFDs are similar to Bitcoin futures in that they are essentially bets on the cryptocurrency's price. When you purchase a CFD predicting that prices will decline, you are shorting Bitcoin.
A contract for differences is settled in in fiat, so you don't need to worry about owning or storing Bitcoin.
CFDs have a more flexible settlement tenure than Bitcoin futures, which have predetermined settlement dates. Additionally, in certain Bitcoin CFD markets, traders can enter into a contract based on Bitcoin's performance or its performance relative to fiat currency or another crypto.
7. Using Inverse Exchange-Traded Products
Inverse exchange-traded products are bets that an underlying asset's price will decline. They are similar to and use futures contracts in conjunction with other derivatives to produce returns. The only exchange-traded product available to residents of the U.S. is ProShares' Short Bitcoin Strategy ETF (BITI). Investors outside of the U.S. can invest in the BetaPro Bitcoin Inverse ETF (BITI) from Canada or 21Shares Short Bitcoin ETP from the European Union.
Factors to Consider While Shorting Bitcoin
As with any strategy related to cryptocurrencies, shorting Bitcoin involves enormous risk. There are several aspects you should consider while shorting Bitcoin.
Bitcoin Price Is Volatile
Most avenues to short Bitcoin depend on derivatives. These derivatives are based on Bitcoin pricing; fluctuations in the cryptocurrency's price have a domino effect on investor gains and losses.
For example, Bitcoin futures mimic spot price changes, meaning they cannot be used as an effective hedge against an investment in actual Bitcoin. Similarly, options trading in Bitcoin can multiply losses due to the underlying cryptocurrency's price volatility.
Bitcoin, As an Asset, Is Risky
Price is just one of several risks you will have to evaluate while shorting the cryptocurrency. As compared to other, more established assets, Bitcoin is nascent. It has been around for only 13 years. Therefore, there isn't sufficient data or information for investors to make an educated decision about its workings or feasibility as an asset.
For example, several issues related to Bitcoin forks are still unresolved. While established platforms like CME are safer and guarantee execution for Bitcoin derivatives, new platforms might start off "clunky" and be more susceptible to hacks.
The Regulatory Status for Bitcoin Is Still Unclear
Though it claims to have global coverage, Bitcoin's regulatory status across geographies remains unclear. Several leading platforms for Bitcoin trading, such as Deribit, and OKEx, are not available to American investors.
The absence of regulatory oversight means that exchanges can get away with offerings that would not be allowed if there were proper oversight. For example, Binance offered 125% leverage for Bitcoin futures trading until 2021. The lack of clarity about regulatory status means that legal recourse for customers of these exchanges is limited.
Knowledge of Order Types Is a Must
Before undertaking a short position in Bitcoin, you should brush up on your knowledge of different order types. They can help limit losses if the price trajectory does not go in the direction that you initially bet—for example, using stop-limit orders while trading derivatives can curtail your losses.
Can Bitcoin Be Shorted?
Yes. You can short Bitcoin's volatile price by betting against it using derivatives like futures and options. However, it is essential to consider the risks associated with shorting, of which there are many.
What Are Some of the Most Common Ways to Short Bitcoin?
The most common way to short Bitcoin is by shorting its derivatives like futures and options. For example, you can use put options to bet against cryptocurrency prices. Contract for differences (CFD), in which you pocket the difference between an asset's actual price and your expected price, is another way in which you can short Bitcoin pricing. Prediction markets are another avenue for shorting Bitcoin.
What Are the Risks of Shorting Bitcoin?
There are two main risks to shorting Bitcoin. The first one is price risk. Price volatility in the underlying asset can make it difficult to accurately predict the price movement of the underlying asset. The second main risk is regulatory risk or its absence. Some of the biggest futures trading venues of the cryptocurrency are not regulated. This means that investors have fewer recourse options if something goes wrong with their trade.
Can I Short Bitcoin Using Leverage?
Many cryptocurrency exchanges like Binance and futures trading platforms allow the use of leverage or borrowed money to place bets on a fall in Bitcoin's price. Bear in mind, however, that leverage use can magnify gains and losses. Therefore, the risk when using leverage is proportionally greater.
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