How to Short Bitcoin – A Complete Guide on BTC Shorting in 2020

How to benefit while the price of Bitcoin fluctuates up and down. In this guide, we cover what short sell Bitcoin is, where to short bitcoin and how to profit by short selling Bitcoin.

Price of Bitcoin fluctuates up and down. In this guide, we cover what short sell Bitcoin is, where to short bitcoin and how to profit by short selling Bitcoin.

Short sell Bitcoin, what is it?

Price of Bitcoin fluctuates up and down. In this guide, we cover what short sell Bitcoin is, where to short bitcoin and how to profit by short selling Bitcoin.

We have all heard the words ‘HODL’ (Hold On for Dear Life) and ‘BTFD’ (Buy The F*** Dip), but in the cryptocurrency world, short sell Bitcoin is a less-discussed strategy. In this article, we will provide guidance on how to short Bitcoin so that you can profit when the next bear market strikes.

Perfect conditions to short BTC

In essence, short selling or short sell Bitcoin refers to betting on the price of assets that it will fall in price. On the contrary, it is quite easy to “go long” on assets, in other words, to expect asset appreciation. For long positions, you can buy and hold Bitcoin, or open a long position on a futures exchange like ByBit, Prime XBT, Binance, FTX or BitMEX. Where to short Bitcoin, you may ask. On the same crypto derivative exchanges, it’s possible to short too.

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On the contrary, traditionally shorting requires a more complicated process, which can be best explained in the context of traditional finance.

Traditional Markets. What is Shorting Stocks?

In the stock market, short selling involves having your broker borrow stocks and sell them immediately. When the trader decides to close the position, the stock will be repurchased. If the price falls, the short clients will profit from the difference between the price they borrowed and the buy-back price.

However, if the price appreciates during this time, the short trader will suffer losses. Usually, leverage is used to short an asset, which amplifies potential losses.

In the same way, you can also short the cryptocurrency or short sell Bitcoin. Considering the possibility of a market decline, such as the one that occurred in 2018, many professional traders have adopted Bitcoin short as a trading strategy.

How to short Bitcoin and cryptocurrencies

In the cryptocurrency market, the main way to go short is through “derivative contracts”.  A derivative contract – is a financial contract whose price is determined by basic instruments. For example, the most traded derivatives in cryptocurrencies are contracts that track the price of Bitcoin against the US dollar.

It is important to mention that when you buy derivative products, it does not mean that you own the underlying assets. That just means that you have to bear the price. Derivatives also allow traders to adopt more advanced strategies that they cannot apply when buying real assets.

Derivatives enable traders to use leverage. Leverage essentially means increasing the potential return of a transaction by using borrowed funds. However, this also increases the risk. Let’s look at an example of linking how to short Bitcoin through derivative contracts.

Underlying Asset vs. Derivatives the Bitcoin Trading Example

Imagine that Bitcoin is trading at $1,000, and you have $1,000 to invest. You can buy one Bitcoin by purchasing underlying assets. If the price of Bitcoin rises by 10%, the amount of your investment will increase by 10% in value. However, if the price of Bitcoin drops by 10%, your investment will also depreciate by 10%.

There is also the fact that you own actual Bitcoin, which is an essential consideration for many people. Suppose the same situation is happening, but you decide to use a derivative contract instead of investing in actual Bitcoin. Derivative contracts allow you to apply 10x leverage.

ByBit cryptocurrency derivative exchange homepage

That means you can use $1000 to buy a contract similar to having 10 Bitcoins for a total value of $10,000. You have your own equity of $1000 in your position, and $9000 is borrowed from the exchange.

If the price of Bitcoin rises by 10%, the total value is $11,000, the initial investment can get a return of 100%, and the purchase of underlying assets is 10%. However, if the price of Bitcoin drops to a level where the equity value is close to zero, the exchange will liquidate the position, and the trader will suffer a 100% loss.

Be aware of the liquidation price

When you buy bitcoin, you will always own it even if the price drops. For derivatives contracts, if you use leverage to trade, it is common for different exchanges to liquidate positions, and the price drops to the point where the initial equity invested by the trader is almost reduced.

When entering a position, the exchange usually clarifies the price at which the position is going to be closed. The Twitter account “BitmexRekt” records the liquidation that occurred on BitMEX, is one of the most popular cryptocurrency derivatives exchange.

BitmexRekt twitter feed highlights liquidation

The same mechanism is used when you short sell Bitcoin. Traders are essentially borrowing funds to short. However, it is also possible to obtain a short position without applying any leverage.

Where to trade Derivatives?

Many exchanges focus on providing cryptocurrency derivatives. One of the most popular are ByBit, Prime XBT, BitMEX, FTX, and Binance. Unfortunately, most of them cannot be used by those in the United States as access is restricted. However, you could trade using VPN service as millions of cryptocurrency traders all around the world do. As barely any other crypto exchange provides the liquidity those mentioned do.

The trading interface of BitMEX

The main contract pair on BitMEX is the XBTUSD perpetual swap, which is a derivative that never expires and tracks the price of Bitcoin against Dollar. Traders can apply up to 100x leverage, which means that owning 1 Bitcoin allows traders to manage a position with an estimated value of 100 Bitcoins (such leverage is available on all highlighted exchanges). 

However, this also means that if the BTC price moves less than 1% in the opposite direction – the position will be liquidated. One more thing to note about trading on Bitmex and Prime XBT is it only deals with Bitcoin. Traders deposit Bitcoin, and if they speculate accurately, their balance of Bitcoin will increase. If they speculate incorrectly, their Bitcoin balance will decrease.

Prime XBT the cryptocurrency derivative exchange homepage

Prime XBT provides a platform that allows traders to trade derivatives with the leverage up to 100 times in crypto and 500 times on traditional pairs. Yes, you can trade not only Bitcoin futures but also traditional markets, forex pairs, commodities, and stocks. Prime XBT, as Bitmex, only operates with Bitcoin. ByBit, Binance, and FTX allow holding and diversifying portfolios in stablecoins such as USDT and USDC and diversifying them among other cryptocurrencies.

Conclusion

By looking at where to short Bitcoin, keep in mind that the exchanges we mentioned are trustworthy. Short sell Bitcoin (shorting Bitcoin) may be a good way to keep your portfolio profitable during market declines. However, beginners should be aware of the risks of derivatives. Instead of the question, can I short Bitcoin, better ask yourself, and study what conditions and how much risk the professional traders’ take before going short on Bitcoin. Choose the best exchange for shorting Bitcoin.

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