How to Short Bitcoin
Learn how to short Bitcoin and how shorting it can help traders potentially make money even when the price of Bitcoin decreases.
Key Takeaways
- Shorting is a trading strategy where a trader borrows an asset, sells it, and buys it back later with the aim of profiting from an expected decline in its price.
- Researching the market and Bitcoin can help inform potential opportunities for shorting. Trading signals are also used to spot Bitcoin price trends and potential turning points.
- Shorting Bitcoin can be done in a variety of ways on trading platforms like the Crypto.com Exchange. These include margin trading and derivative contracts, such as futures and options.
- Since markets can be unpredictable and volatile, shorting Bitcoin is also a potential way to hedge against losses in other trading positions.
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What Is Shorting?
The term ‘shorting’ in trading comes from ‘short selling’, which refers to the strategy where a trader borrows an asset and immediately sells it with the aim of profiting from an expected decline in its price.
The short seller covers the position by buying the asset back sometime later, and if it is at a lower price than what they initially sold it for, they pocket the difference. In essence, short sellers are betting that the value of the asset will fall, enabling them to repurchase it at a lower price later on.
Shorting can also be done via derivative contracts, such as futures and options. Derivative contracts allow the trader to gain exposure to the price movement of an underlying asset (e.g., Bitcoin) without having to actually own it.
How to Identify Bitcoin Trends and Potential Shorting Opportunities
Researching the market as well as Bitcoin can help inform potential opportunities for shorting. Crypto.com University features articles covering these topics and more, including market cycles, Bitcoin halving, how to DYOR, and what influences cryptocurrency prices:
What Influences the Price of Crypto?
Four Phases of the Crypto Market Cycle
What Is a Crypto Greed and Fear Index?
What Is Bitcoin Halving and How Does It Affect BTC Price?
Additionally, trading signals are commonly used to analyse Bitcoin price trends and potential turning points. Learn about the different types of trading signals in these useful articles:
10 Bearish Crypto Trading Indicators to Know
The Golden Cross and Death Cross in Crypto Trading
How to Read Crypto Charts — A Beginner’s Guide
How to Read Candlesticks on a Crypto Chart: A Beginner’s Guide
Grid Trading: What It Is and Tips for Getting Started
After identifying a Bitcoin shorting opportunity and opening a trading position, it is important to monitor the position and consider adopting risk management strategies like setting stop-loss and take-profit levels. Ultimately, the Bitcoin price may increase instead of the expected decline, leading to potential losses. Additionally, since many shorting methods involve margin (and therefore leverage), losses can be potentially magnified.
Steps to Short Bitcoin
Shorting Bitcoin can be done in various ways on trading platforms like the Crypto.com Exchange. These include margin trading and derivatives, where available.
Margin trading
Margin trading involves using borrowed funds to pay for a trade. It allows the trader to open a Bitcoin position by using collateral, but without having to pay the full amount from their pocket. Margin trading can also be used to generate leverage in a position, which can potentially magnify gains and losses.
Learn more about margin trading and leverage in Crypto Spot Trading vs Margin Trading: What Is the Difference?
Shorting Bitcoin via margin trading on the Crypto.com Exchange, for example, involves the following steps:
- Sign up for the Crypto.com Exchange.
- Open a margin trading account, if eligible.
- Conduct thorough research on the market and Bitcoin.
- Place a short sell order for Bitcoin.
- Set stop-loss and take-profit levels.
- Monitor the trade and manage risk.
Derivatives trading
A commonly used type of derivative for shorting Bitcoin is the futures contract, which is an agreement between a buyer and seller to buy (also called ‘long’) and/or sell (also called ‘short’) Bitcoin at a set future date (expiry date) for a set price. A short futures position profits when Bitcoin’s price falls, while a long futures position profits when the price rises. Trading futures also typically can involve the use of margin.
In the example below, Trader A longs a futures contract, with Bitcoin as the underlying asset, at a set price of $26,000. On the other side of the trade is Trader B, who shorts the contract. For the sake of simplicity, we ignore the effect of margin and leverage.
Shorting with futures on the Crypto.com Exchange, for example, involves similar steps to margin trading shown above.
Options are another type of derivative that provides exposure to Bitcoin’s price movement. Buying a put option profits when Bitcoin’s price falls:
Learn more about futures and options in Introduction to Crypto Derivatives, Options, and Futures.
Another way to short Bitcoin is with UpDown Options, a special type of derivative that automatically terminates if Bitcoin’s price hits a predetermined ceiling or floor, locking in profits or protecting against major losses. UpDown Options are fully collateralised, thus permitting traders to gain effective leverage in a trade without using margin (borrowing).
With UpDown Options, users can choose to buy or sell a contract depending on which way they think Bitcoin will go. If they think Bitcoin’s price will rise, they can buy a contract to open a long position. If they think the price will decrease, they can sell a contract to open a short position.
Learn more about UpDown Options in What Are UpDown Options?
Shorting as a Way to Hedge
Since markets can be unpredictable and volatile, shorting is used by some traders as a way to hedge, or protect, against losses in other trading positions.
For example, if a trader buys Bitcoin on the spot market and its price falls, this could lead to losses. To hedge against some of the potential loss, the trader can short Bitcoin via derivatives, as the short futures position would profit if the price of Bitcoin falls.
Conclusion on How to Short Bitcoin
Shorting potentially allows traders to profit from a decline in the Bitcoin price. It is also used as a strategy by some traders for hedging risks in unpredictable and volatile markets. For those wanting to short Bitcoin, it is important to conduct thorough research, analyse market trends, adopt risk management strategies, and closely monitor positions.
Due Diligence and Do Your Own Research
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Frequently Asked Questions
Short squeezes are one of the most significant risks in shorting Bitcoin. During a squeeze, traders purchasing Bitcoin drive demand higher, while short traders have to cover their short positions by buying BTC as well. These short-covering purchases add further to demand, perpetuating the cycle and increasing the cryptocurrency’s value.
Short squeezes can happen in any market, so they aren’t unique to Bitcoin. Generally, squeezes occur as a result of another catalyst that increases buying demand. Other times, they happen because short interest rises to an unsustainable level, creating an imbalance in the market that triggers the squeeze.
Some Bitcoin holders criticise short interest as betting against Bitcoin and crypto, but short selling can also promote market participation and thus boost liquidity. Many traders who are short may not even want to see the price of Bitcoin drop, but instead use shorting as a risk management tool. For instance, they might hedge a positive long option play with a leveraged Bitcoin short position so that a losing trade results in a minimal drawdown.
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