With the price of Bitcoin rallying more often than not, the cryptocurrency community is divided into two camps: those who believe that the bull market is here in full force and those who think that a swift correction is never too far away.
Why do people short Bitcoin?
Shorting Bitcoin makes particular sense during a bear market when prices are trending down. When you short Bitcoin, you predict that its price will fall by a certain amount by a specified date. If you are correct, you make a profit even though the price went down.
So, if you belong to the camp of traders who believe that a crash is imminent in the future, you might want to try to short Bitcoin. However, if you’re bullish on the price of BTC at the moment and think it will continue to rise, now is not the best moment to bet on the price going down.
How to short Bitcoin
There are several ways that you can short Bitcoin depending on the level of risk you want to assume and your experience. Let’s take a look at each one here.
These exchanges lend you money so that you can trade often with leverage included, which can increase your profits (or losses) substantially. If you want to margin trade with leverage, remember that it can be particularly risky if you make the wrong call.
Bitcoin futures allow you to maximise your returns by speculating on the price even without owning BTC directly. It’s an advanced trading strategy in which you use the power of leverage and speculate on the direction of the market.
In short, you agree to buy or sell Bitcoin at a specified future date and price. Understanding how the market works is crucial when you short Bitcoin through futures. Experienced traders prefer futures trading because it allows them to minimise risks significantly. This is thanks to the fact that they need to hold less Bitcoin than on a spot exchange.
Binary options trading
Binary options trading is a more advanced method to short Bitcoin by executing an order through an escrow service. This move enables you to sell BTC at the current price at a later date even if the price goes down.
In this case, the outcome depends on a binary “yes or no” proposition. When the binary option expires in the money (ITM), which means that the price is favourable, the trader receives a payout.
You can also lose your funds quickly if the binary option expires out of the money. Binary options trading is one of the most high-risk strategies to short Bitcoin.
Short-selling Bitcoin assets
Short-selling BTC is an alternative method to short Bitcoin when you don’t feel comfortable with the more advanced trading techniques. However, many investors find this method less appealing and still too risky to be worth the effort.
Short-selling Bitcoin means selling off your digital assets when you’re satisfied with their value and buying again when the price drops.
The downside of this method obviously comes when the market doesn’t move as you plan. If that happens, you could lose either money or BTC, depending on how the price evolves.
Still a new entry in the crypto world, prediction markets trade the outcome of events. It’s about placing a bet on possible results from binary options – on price fluctuations, sales of a company, elections, and so on.
Platforms like Predictious allow you to earn money from making market predictions and trading Bitcoin. The difference between prediction markets and gambling is that in the first case, you can make documented decisions based on previous data. This means that your predictions are more likely to become more accurate over time, with better returns on your investment.
You may have heard people in the space say statements like this:
Long Bitcoin, Short the Bankers.
— Pomp 🌪 (@APompliano) September 26, 2018
But what does it really mean? Essentially, it means that Bitcoin will continue to grow and take its place as an alternative global financial system, and banks will fall by the wayside. Or in other words… stop betting on the price of Bitcoin to fall, and be bearish on banks instead.
However, the market is still too unpredictable to keep all your eggs in one basket. So, it’s worth trying out a few different trading strategies and coins. If you learn how to short Bitcoin successfully, you’ll have another feather in your cap.
Disclaimer: The views and opinions expressed by the author should not be considered as financial advice. We do not give advice on financial products.