How to Short Bitcoin?

07.10.2019

Just think about it: if you had invested a single dollar in Bitcoin when it just emerged, today it would be worth almost $1,5 million! But it doesn’t mean that you have missed the boat: cryptocurrency is extremely popular, so if you want to trade – go for it! All you need is to get familiar with a variety of tools and methods.

One of which, short bitcoin trading, we will discuss in today’s article. If you want to trade like a pro, we also recommend paying attention to the following article. It literally is a treasury of everything you need to know about cryptocurrency trading!

 

What Is Bitcoin Shorting?

What does it mean to short bitcoin? If you Google the question, you will get millions of results. We will try and give you the most accurate and simple answer you will ever find.

When investors short sell bitcoin on a crypto exchange, they sell a bitcoin they don’t possess. To do that they borrow bitcoin from exchange margin lenders, while the position is open.

The whole point of bitcoin shorts is to sell the asset with a hope that it will be redeemed soon for a lower price. Here is an example: you sell borrowed bitcoin short, when the price is $10,000. The price drops to $8,000. You repurchase the Bitcoin for $8,000 to return it to the lender. And you make $2,000 ($10,000 - $8,000) out of thin air! 

But if you don’t want to waste your time and energy on learning how to short bitcoin, you can always turn to crypto bots. The whole point is that you can always create your short bot (or choose an existing one) and simplify the trading process. You can read about these useful pieces of code (we mean bots) here

 

How to Short Bitcoin with Margin Trading?

There is no better way to learn how to short bitcoin than to use a clear example. Let’s assume that you foresee a potential decrease of Bitcoin price from $10,000 to $8,000, the next support level. You transfer funds to broker’s margin account. But considering that it’s impossible to sell what you don’t possess, the system automatically sends the necessary amount of assets to your account once you open a short bitcoin position.

Then you sell it and voila, you make money on the difference!

However, you will need to pay a certain fee for bitcoin shorts, which is calculated per every day of holding cryptocurrency. If exchange doesn’t have free assets, position is automatically executed in the lending section from other market participants at current rates.  

It is impossible to learn how to short bitcoin without understanding principles of interest rates on the loan, so you need to learn the requirements of a particular exchange before making bitcoin shorts. Every exchange has its own loan interest but usually these rates are rather low, around 0,002% daily for a borrowed Bitcoin. When you cover the position, you are charged a certain fee. If you have been holding a position for more than a day, your fee equals a daily fee multiplied by the quantity of days. When you are dealing with crypto exchanges and learning how to short bitcoin we advice paying attention to one thing:

If you participate in margin trading, you will need to pay the daily fee no matter whether you open a short bitcoin position or not. That is why it makes sense to enter margin trading only with a full commitment of opening a short position. Otherwise we recommend transferring funds to an exchange, so you won’t have to pay a fee for simply storing borrowed assets. 

 

How to Short Bitcoin with Futures?

 

 

When Bitcoin futures emerged, another way of short selling bitcoin appeared. So how to short bitcoin with futures’ help? 

Let’s start with a brief definition:

Future is a contract, which allows you to get cryptocurrency or assets once the contract is closed, for the price you have sold them.  There are two types of futures: settlement and delivery ones, and you should know the difference if you want to learn how to short sell bitcoin successfully.

At the moment CME exchange trades only settlement futures. This means that you get not the asset according to the futures but the price difference between buying and selling. Similarly, you get such a difference when opening a short bitcoin position.

Futures market offers a so-called guaranteed security. When you buy Bitcoin futures, you only pay 2-10% of the actual Bitcoin price. Futures trading already includes leverage, so we recommend trading futures only if you have at least 6 months of crypto trading experience. Or if you know how to short bitcoin and have studied all peculiarities of trading on the futures market.

 

Bitcoin Shorting with Leverage

Now, when you are familiar with definitions, let us learn how to short bitcoin on example of a Bitfinex exchange. Apart from short trading you can also play on crypto exchange and increase your capital with the help of margin trading.

For example, you want to open a short bitcoin position having $10,000 on your account. For a short trade you need to transfer assets on exchange’s margin account. Keep in mind, if you have $10,000 you’ll be able to open bitcoin shorts only on the same sum. However, you can increase your trading capital up to $33,000 and then open a short position on this amount. Thus you can get a x3,3 leverage. 

Don’t forget that you’ll need to pay a daily fee for additional borrowed funds and a fee for granted leverage. These are two different fees!

Lending rate can be found in Bitfinex section ‘Margin funding’. Luckily, exchange’s website has plenty of useful information in open access, so you won’t have any problems learning how to short bitcoin on Bitfinex.

 

What Is the Main Target of Shorting Bitcoin?

Before you start asking yourself ‘How do I short bitcoin?’ you need to understand what your main goals are. Opening bitcoin shorts pursues two main goals: speculative selling and long position hedging.

For example, you have bought a Bitcoin and store it on an exchange, in a hot or a cold wallet. You see that the price is going down. You can hedge your Bitcoin by opening a short bitcoin on a cryptocurrency or a futures exchange. In such a way you are able to fix the result of your investments. Once the Bitcoin price starts to grow, you cover a short position and simply hold your Bitcoin. We recommend using this strategy only to experienced traders, who have not only mastered how to short bitcoin but also are able to detect, when Bitcoin price will reverse.

In case you are opening bitcoin shorts to speculate and make profits on the difference, you can choose one of the below tactics.

The first one should be used only at counter trend strategies. They are applied on a bull market. Counter trend short position is a position, which is opened against growing cryptocurrency. For example, Bitcoin has increased from $10,000 to $13,000 and you see that the price may decrease to $11,000. At a certain moment, following a clear btc shorts strategy, you short bitcoin to earn profits on a $2,000 movement. However, you need to be very attentive, when you conduct counter trend trades. If you fail, you should cover the position immediately based on the stop that you have predefined. The whole point of mastering how to short bitcoin is to make a speedy but a profitable decision.

 

 

The second tactic is used on a bear market. If Bitcoin has peaked and reversed, you need to conduct a short sell in order to benefit from a rapid decrease of the price. Distinguishing feature of this tactic lies in the fact that you use long-term strategies to maximize your profits during Bitcoin fall on a bear market.

And how do you short bitcoin?

 

Bitcoin Shorting on Bull Market

 

 

The best way how to short bitcoin on a bull market is to use only counter trend strategies. However, we don’t recommend them to novice traders, because they require extreme discipline and fast reaction (although these qualities are necessary any time during a short bitcoin).

The best place to apply shorting bitcoin strategies is the bear market. Price usually goes down and it makes strategy’s profitability more likely. At this market stage it is advisable to apply technical bear figures – triangles and reverse pennants.

Such reversal figures as “head and shoulders”, “double top” and “V-shape turnaround” also proved their efficiency during bitcoin shorts.

As you see, it is not enough to understand basic principles if you want to know how to short bitcoin: it is important to know all the strategies and to apply them skillfully.

 

Short Covering

If you want to learn how to short bitcoin you should understand not only its positive aspects but also all the troubles such trading can withhold.

One of its most serious drawbacks is that in case of unpredictable circumstances you risk losing your capital. When a Bitcoin is bought without leverage, the capital is lost only when the price equals zero. 

It is a big advantage for ordinary investors, which allows not to fix losses but to wait for a price growth and to make a profit. Only time is trader’s foe.

On the contrary, during bitcoin shorts you use margin trading, which includes position’s liquidation risk. Don’t forget that compared to going long, you pay a daily fee for going short.

And if you trade on a borrowed capital, you also pay a leverage fee and position’s liquidation will be closer in price than if you trade on your own capital. When a short position is opened, exchange gives you a price calculation at which your position will be cleared and you will get a margin call.

So when you decide how to short bitcoin it is necessary to consider all your options and to come up with the most suitable strategy.

 

Final Words

Bitcoin price is rather volatile and many market analysts claim that it will continue to rise and fall on the regular bases. That is why learning how to short bitcoin is one of the most urgent tasks that any trader is facing at the moment.

Today we have discussed everything you need to know about short bitcoin: it’s definition and importance, pros and cons, as well as shorting on bull markets. We have also discussed bitcoin shorts through the prism of margin trading and futures.

At this point you are probably no longer afraid of short bitcoin and know how to treat it right. If you have any questions left, feel free to ask! 


 

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