Cryptocurrency trading platforms have evolved rapidly over the years and created different ways for people to short sell Bitcoin. This is an advanced method to hedge a crypto portfolio or profit from sudden volatility. Shorting Bitcoin, or otherwise known as short selling Bitcoin can result in massive profit potential but does carry risk. In this guide, we explain what is Bitcoin shorting and when to do it.
Shorting is when a person borrows money to sell the value behind Bitcoin in order to buy it back at discounted price to return to the sender. It is the opposite of the manta 'buy low and sell high'. A person who short sells Bitcoin is betting on the price of Bitcoin will decrease in value in order to buy Bitcoin back for a cheaper price. The difference between the money that borrowed to short Bitcoin and returned once the position is closer at a lower price becomes their profit minus any fees.
A few key points to remember about shorting Bitcoin:
- Shorting is essentially betting on the asset value decreasing in price
- Shorting can increase the amount of Bitcoin in a portfolio by profiting on price corrections during an uptrend
- Short selling can hedge a Bitcoin portfolio to lock-in gains and minimize losses during a downtrend
- Short selling Bitcoin can create significant profit potential by using leverage to borrow more money
- Short selling is risky and can result in losses that exceed the initial deposit amount
- Create an account with a CFD, margin, futures platform such as FTX
- Complete ID verification and deposit money to fund an account
- Select the Bitcoin trading pair (e.g. futures, derivatives contract or margin)
- Enter the price to short BTC and the amount
- Choose the amount of leverage to use
- Review the trade and confirm the Bitcoin short position
The best way to explain short selling Bitcoin is using an example. If a person is confident the BTC price will decline over the coming days or weeks, they can borrow 5 BTC at $35,000 per coin and sell it on the open market for $175,000 using a cryptocurrency leveraged trading platform.
If the price of Bitcoin decreases to $28,000, the person can decide to buy back the 5 BTC for $140,000. The 5 BTC that was borrowed for $175,000 is paid back to the exchange and a net profit of $30,000 is realized (i.e. $175,000 minus $140,000). However, if the person sold the 5 BTC when the price of Bitcoin increased to $38,000 per coin, the person would have to pay back $190,000 to the exchange and make a net loss of $15,000 (i.e. $175,000 minus $190,000).
1. Margin Trading Platform
One of the easiest and safest methods to short Bitcoin is to create an account with a cryptocurrency margin platform. There are several popular trading exchanges such as Binance, Kraken and Phemex that offer margin trading. Users can increase their position size by borrowing funds to short Bitcoin and other cryptocurrencies using leverage. For example, Kraken features an advanced trading platform with up to 5x margin to multiply he earning potential by five times compared to a standard BTC spot trade.
2. Futures Contracts
Cryptocurrency exchanges that offer futures trading can short sell Bitcoin without owning the actual asset. Instead, the seller enters a contract with a specific time and price that Bitcoin will be sold at. This allows the person to short Bitcoin by speculating the overall price of BTC will be lower in the future. Bybit and FTX are popular platforms for futures trading that are supported in most countries. Bitcoin investors in the United States that want to trade futures are limited due to strict regulations.
3. Bitcoin CFD Platforms
A Contract For Difference (CFD) is a financial agreement between a buyer and a seller that pays the difference in settlement price between the open and closing trade. CFD's are ideal for beginners due to its ease of use compared to trading Bitcoin futures products or the hassle associated with depositing BTC to the exchange. Traders that CFD platforms such as eToro and Plus500 can short sell Bitcoin using fiat currency such as the US Dollar.
4. Binary Options Trading
Binary option platforms such as FTX and Deribit allow for the future speculation of the Bitcoin price. It involves purchasing the right but are not obligated to sell an agreed amount of Bitcoin at a specific date. Similar to CFD's and Futures contracts, traders do not need to purchase the real asset which makes Bitcoin options trading suitable for both beginners and experienced investors to hedge their portfolio. The downside to trading options is the expensive fees during high volatility which is expected for Bitcoin.
5. Short-Selling The Actual Bitcoin
The easiest way to short Bitcoin is to sell the actual asset using a fiat-to-crypto exchange by converting BTC into traditional money. The individual has full control over the price to sell Bitcoin to cash and re-buy at a lower price to increase BTC holdings. For example, a person could sell BTC at $35k and buy it back at $30k resulting in a modest increase in Bitcoin. The risk with selling the actual Bitcoin is missing out on a lower price and having to buy back at a higher Bitcoin price.
The aim behind shorting Bitcoin is to execute a sell order when the price is at an extreme high in order to buy it back at a lower price. This is opposite to the traditional investing concept of buy low and sell high which can be difficult to time in the market. During a bull market, a common strategy is to short sell Bitcoin at predetermined swing highs to reduce losses during corrections to the downside and protect their capital investment.
Common reasons for investors to short Bitcoin include:
- Price is too high: A person that speculates the price of Bitcoin is overvalued or in a bubble based on fundamental metrics or technical analysis at a given point in time can decide to short BTC.
- Hedge to reduce losses: A person that is holding large amounts of Bitcoin and believes a correction is due can short Bitcoin using a margin or Futures platform to minimize potential losses during a downtrend.
- Bearish sentiment: For reasons based on fundamentals or technical charting analysis, a person that believes Bitcoin has reached a top in a market cycle can place short sell orders to profit on price declines during a bear market.
- Short Term Speculation: High price volatility associated with Bitcoin entices both retail and institutional investors and traders to use leverage to reap huge potential gains. Experienced traders and institutional firms are able to maximise their return on investment using leverage by profiting off inexperienced crypto traders that lose money.
Bitcoin is a highly volatile asset class that can experience sudden price movements. The high volatility presents great opportunities for advanced traders to speculate on the future BTC price or small price changes to make profits.
- Hedge portfolio risk: Short-selling Bitcoin allows a person to hedge the risk of a larger portfolio. For instance, if they hold Bitcoin but are concerned the price is overvalued in the short term, the person can open a short sell position on Bitcoin. If the price of Bitcoin does decline, the short position will have an unrealized profit to offset the decline in value of the BTC price correction.
- Profit during a bear market: Some people believe money is only made during the bull cycles. However, Bitcoin shorting creates an opportunity for experienced traders to profit during a downtrend or longer term bear market. Shorting BTC is also suitable for sceptics and naysayers that do not believe in Bitcoin.
- Maximize benefits of volatility: The cryptocurrency market is the most volatile financial markets and can experience sudden price movements in both directions. Markets with large price swings are great for traders that can use high leverage to make potential profits on multiple positions throughout the day.
Shorting Bitcoin is a good trading strategy for experience investors and professional traders. It is highly speculative that comes with certain risks that do not exist with the traditional buy and hold method using a Bitcoin hardware wallet. Trading CFD's, Futures and derivatives involve leverage which creates the possibility for uncapped losses that can exceed deposited funds.
Bitcoin is also a highly volatile asset class with sudden price movements both up and down that can result in forced-liquidations and margin calls. Shorting Bitcoin is recommended for experienced investors and professional traders with sound risk management principles.
The top Bitcoin trading exchanges offer a variety of financial products to enable users to short sell Bitcoin. For advanced crypto investors and professional traders, short selling Bitcoin can be a very profitable strategy to manage risk, profit during a downtrends or hedge against market volatility. However, speculating on the BTC price to enter a short position comes with significant risk and is not recommended for beginners that have a habit of entering trades as a result of FOMO or FUD.
Kevin is the founder and chief editor at HedgewithCrypto that he started in 2019 which has reached over 1.5 million visitors worldwide. He is passionate about cryptocurrency as an emerging technology and is heavily involved in the fast-growing fintech space. An experienced trader growing his portfolio since 2016, he has a strong understanding of investing in the crypto market using exchanges, brokers and derivatives platforms.