One way to profit from a fall in the price of a specific asset is to engage in short selling, which is a kind of financial strategy. You will learn the art of shorting Bitcoin as well as what red flags to watch out for in this post.
Shorting the currency is an option that might be beneficial for investors who have the expectation that the value of Bitcoin (BTCUSD) will drop at some time in the foreseeable future. Because of Bitcoin’s growing visibility in traditional financial markets, there are now more places and methods than ever before to engage in the practice of shorting this cryptocurrency.
As the market for cryptocurrencies matures, new possibilities to take a position on bitcoin emerge. These opportunities are constantly being produced. Learn what “shorting” bitcoin is, why some traders choose to engage in the practice, and how you may engage in shorting bitcoin using these four steps.
Shorting Bitcoin in Four Steps
#1 Get familiar with bitcoin
When short selling any asset, you need to have a solid awareness of the market as well as a complete understanding of trading tactics. Since the cryptocurrency market is still in its infancy compared to other financial markets, it may be thrilling but also quite unpredictable. Because of this, it is much more essential for traders to put in the effort to get a solid understanding of bitcoin.
#2 Choose the method that you wish to use to short bitcoin
Shorting bitcoin may be accomplished in several different ways. We look at two of the most common approaches of shorting bitcoin, namely via the use of a broker and derivative instruments.
- The Traditional Practice of Short-Selling
Some bitcoin exchanges may provide facilities for short selling, but this will require you to borrow the real asset from your broker or a third party to then sell it on the market. If the price of bitcoins on the market dropped, you would be able to purchase them back at a lower price, giving the bitcoins back to the person who originally had them while making a profit from the price difference.
- Transactions Involving Derivatives
As a result of the limitations associated with conventional short-selling, there has been a rise in interest in the use of derivative products as an alternate form of short-selling bitcoin. Financial products known as derivatives derive their value from the underlying market, which in this instance is bitcoin. Because you are just betting on the future direction of the market while using derivatives, there is no need for you to borrow bitcoin from a third party.
#3 Take Measures to Minimize the Damage
As more and more people get on board with short selling, the price of bitcoin is being subjected to an even greater amount of negative pressure. This is because short selling has become more popular in recent years. However, it is essential to keep in mind that short selling is not without its inherent dangers.
When you short a market, the most significant risk that you take on is that there is an endless potential loss. When you acquire a bitcoin, the maximum amount that you may lose is equal to the price at which you purchased the coin. When you sell a bitcoin, however, there is no limit to the amount that the market may move against you, and as a result, there is no limit to the amount of loss that you might experience. Because of this, it is essential to acquire the skills necessary to properly manage risk before beginning to trade.
#4 Establish Your First Stake, and Keep an Eye On The Market
After you have made up your mind about how you are going to safeguard yourself, it is time to initiate the first of your short-selling positions. It is essential to be vigilant for anything that has the potential to trigger an abrupt change in the price of bitcoin. Using IG’s news and trade ideas, which provide you with access to information and analysis provided by industry professionals, you can track developments that occur on the bitcoin cryptocurrency market.
Which of the Following Is Among the Most Frequent Ways to Short Bitcoin?
Shorting Bitcoin using one of its many derivatives, such as futures or options, is by far the most frequent strategy. For instance, if you want to wager against the price of the cryptocurrency, you may utilize put options. Shorting the price of Bitcoin may also be done via the use of a financial instrument known as a contract for differences (CFD). With this strategy, you profit from the difference between an asset’s actual price and your predicted price. Another method for betting against Bitcoin is via the use of prediction markets.
What Dangers Are Inherent in Selling Bitcoin Short?
When shorting Bitcoin, there are two primary risks to consider. The first one is the risk associated with prices. When there is price volatility in the underlying asset, it might be difficult to precisely estimate how the price of the underlying asset will change. The lack of a universally accepted regulatory framework for bitcoin all around the globe is the second most significant danger. There is a lack of oversight over several of the most important futures trading platforms for cryptocurrencies. If anything goes wrong with an investor’s deal because of this, the investor will have fewer alternatives for seeking legal redress.
Is It Possible to Sell Bitcoins Using Leverage?
If you want to gamble on the price of Bitcoin going down, you can utilize leverage or borrow money on several different cryptocurrency exchanges and futures trading platforms. One such site is Binance. However, you should be aware that using leverage may increase both your earnings and your losses. Because of this, the risk that comes with employing leverage is proportionately higher.
The Bottom Line
The process of borrowing bitcoin to sell it on the market and then purchasing it back at a cheaper price is known as “shorting.” Traders act in this manner with the expectation of making a profit from the disparity in prices. Speculative and risk management strategies motivate traders to short bitcoin.
Shorting bitcoin may be done in several different ways. The use of derivative products such as CFDs and selling the asset via the intermediary of a broker are both common practices. Although short selling does include risks, developing a plan for mitigating those risks is critical before engaging in the practice.
After you have established your initial short-selling position, it is important for you to keep abreast of any developments in the bitcoin market by keeping up with the latest news and research in this space.