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How to Short Bitcoin (BTC) and Other Cryptocurrencies

How to Short Bitcoin (BTC) and Other Cryptocurrencies

Learn how to short Bitcoin and how shorting it can help traders potentially profit even when the price of Bitcoin decreases.

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How To Short The Crypto Market

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.

  • Since markets can be unpredictable and volatile, shorting Bitcoin is also a potential way to hedge against losses in other trading positions.

  • 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. 

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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 cryptocurrency 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 and 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:

Crypto 101: How to DYOR

What Influences the Price of Crypto?

Four Phases of the Crypto Market Cycle

Crypto Fear & Greed Index: What It Is and How to Use It

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?

To short Bitcoin via margin trading on the Crypto.com Exchange, for example, involves the following steps:

  1. Sign up for the Crypto.com Exchange.
  2. Open a margin trading account, if eligible.
  3. Conduct thorough research on the market and Bitcoin.
  4. Place a short sell order for Bitcoin.
  5. Set stop-loss and take-profit levels.
  6. Monitor the trade and manage risk.

Derivatives Trading

A commonly used type of derivative to short 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.

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?

Additionally, users can utilise Strike Options, a CFTC-regulated crypto derivatives product in the Crypto.com App. Strike Options streamline the contract trading experience, turning users’ decisions on price movements into straightforward ‘yes/no’ propositions and rewarding them for accurate predictions. Users make a prediction on whether the price of an underlying asset (e.g., BTC) will be higher than a certain price at a certain time. If a trader thinks it will be, they buy. If not, they sell.

For instance, say a BTC Strike Option contract expires at 4 pm with a strike price of $26,000. If a trader believes the asset’s price will surpass the strike price at expiration, they buy; otherwise, they sell. The maximum loss on their trade is the initial amount they invested to open the position plus fees; nothing more. This makes Strike Options potentially appealing to both novices and seasoned traders due to their straightforward nature in trading and clearly defined risk.

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 bitcoins on the spot market and BTC’s 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 and Other Cryptocurrencies

Shorting potentially allows traders to profit from a decline in the price of Bitcoin and other cryptocurrencies. 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

All examples listed in this article are for informational purposes only. You should not construe any such information or other material as legal, tax, investment, cybersecurity, financial, or other advice. Nothing contained herein shall constitute a solicitation, recommendation, endorsement, or offer by Crypto.com to invest, buy, or sell any coins, tokens, or other crypto assets. Returns on the buying and selling of crypto assets may be subject to tax, including capital gains tax, in your jurisdiction. Any descriptions of Crypto.com products or features are merely for illustrative purposes and do not constitute an endorsement, invitation, or solicitation.

In addition, the Crypto.com Exchange and the products described herein are distinct from the Crypto.com Main App, and the availability of products and services on the Crypto.com Exchange is subject to jurisdictional limits. Before accessing the Crypto.com Exchange, please refer to the following links and ensure that you are not in any geo-restricted jurisdictions for Spot Trading and Margin Trading. 

UpDown Options are subject to jurisdictional limits and only available to US users of the Crypto.com App. Foris DAX Inc. and Foris Inc. (d/b/a Crypto.com) offer connectivity to Crypto.com | Derivatives North America, which is regulated by the Commodity Futures Trading Commission, for the purpose of trading derivatives on and subject to the rules of Crypto.com | Derivatives North America.

Past performance is not a guarantee or predictor of future performance. The value of crypto assets can increase or decrease, and you could lose all or a substantial amount of your purchase price. When assessing a crypto asset, it’s essential for you to do your research and due diligence to make the best possible judgement, as any purchases shall be your sole responsibility.

Trading on margin involves the risk of loss of your entire margin account balance. Before trading in a margin account, you should carefully review the margin agreement. By trading on margin, you can lose more funds than you deposit in the margin account. A decline in the value of assets that are purchased on margin may require you to provide additional funds to the firm that has made the loan to avoid the forced sale of those assets or other assets in your account(s).

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Frequently Asked Questions

A Bitcoin ‘short squeeze’ occurs when Bitcoin’s price spikes upward, leaving traders positioned for Bitcoin to drop in price with significant losses. These losing traders want to get out of their short positions as they otherwise face potential liquidation. Squeezes are difficult to predict, but they can lead to quick, massive price increases.

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.
Bitcoin short interest refers to the total number of open short positions, or positions that are not covered. There is no central database for Bitcoin short interest, so estimators compile information from multiple sources and use formulas to arrive at their metrics.

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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