How to Short Bitcoin
The profits that can be made from trading cryptocurrency are astounding. Prices move much faster than traditional assets. Traders never see this kind of volatility outside of crypto. Cryptocurrency is a traders playground, if you’re doing it right.
Stacking your profits when prices are climbing higher is simple, you can just buy and hold. However, you may not know that you can also profit when prices are dropping.
It’s called shorting. Let’s go over how shorting works and then we’ll show you how to short Bitcoin.
What is shorting?
A short is a trading position you can open which is essentially a ‘bet’ on the price of an asset decreasing in price. The opposite of this is a long position, which is betting on the price increasing.
So, with a short position open on Bitcoin, if the price drops you’ll make money. If the price rises, you’ll be at a loss.
We’re going to look at two ways that you can short Bitcoin. The first allows you to profit from price drops, but also isn’t technically classed as shorting. The second is true shorting – you use leverage trading to open a short. Don’t worry, it’s not as complicated as it sounds.
How to short Bitcoin on spot
Spot trading is ‘standard’ trading, where you trade one asset for another, like Bitcoin for USD. If you’ve bought or sold Bitcoin on an exchange, you’ve completed a spot trade before.
You can short using spot trading in two easy steps:
- Sell Bitcoin when you think price is about to drop
- Buy your Bitcoin back for a lower price
It’s as simple as that. Of course, if the price of Bitcoin goes up once you’ve sold, if you were to buy back in you would then have less Bitcoin than you once had.
Here’s a quick example. You have 1 Bitcoin and you sell it for $10,000. The price then drops to $9,500. You now have two options:
- Buy back your 1 Bitcoin for $9,500 and keep the extra $500 as profit
- Buy $10,000 worth of Bitcoin, meaning you now have 1.052 Bitcoin instead of the 1 you had before
As you can see, with this method you can profit from a price decrease or you can use it to increase your Bitcoin holding.
How to short Bitcoin the real way
Using spot trading is a great way to win if you think the price is going to drop, but it’s not the true way to short since you must own the asset beforehand. What’s more, this method depends on the asset price going back up after you’ve bought back in, otherwise you won’t technically profit.
Real shorting allows you to profit from price decreases and then run away with your profits, if you so wish.
What you need is an exchange that offers leverage trading. When you open a Bitcoin short position, you borrow Bitcoin from the exchange and instantly sell it on the market. Let’s say you borrowed the Bitcoin and sold it for $10,000. The aim of the trade is to buy back the Bitcoin for less than you sold it. If you can, you’ll keep the profit.
Shorting is possible without owning any Bitcoin because you can, for example, fund a Bitcoin short with USD and take your profits in USD. No need to own any Bitcoin.
Looking at leverage
Now, the slightly more complicated part is what’s called ‘leverage’. You may have been thinking, why would an exchange lend me Bitcoin to sell and buy back?
It’s all part of the margin trading system. Leverage represents the amount that you are borrowing from the exchange. It’s easier to understand with an example.
Leverage is offered in amounts like 2x, 4x, 10x, 25x and many more. The higher the number, the more you are borrowing and therefore, the less of your own money you are putting in the trade.
However, the higher leverage you are using, the higher the risk, so keep that in mind.
The maths is straightforward. If you are placing a 2 Bitcoin short at $10,000 with 2x leverage, you’ll be putting up half of the money yourself. Since the trade is worth $20,000 (2 BTC x $10,000), you’ll have to put up $10,000.
If you were using 10x leverage for this trade, you would only be putting up one tenth of the money, which would be (2×10,000)/10 = $2,000.
When you are using leverage trading, make sure you use a stop loss to control your trade and stop it getting out of hand. Also, you will be paying interest on any money that you borrow, so keep that in mind.
Placing a short
Once you’ve found an exchange that can facilitate margin trading, all you have to do is place the order. Simply enter the price you’d like to open your short, enter the size of the trade and the leverage, and open the trade.
Now you know how to short Bitcoin!
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About Alex Aves
Alex is a crypto enthusiast that has been enthralled with the crypto space for over two years now. He currently works in the marketing team for Liquid, one of the leading crpytocurrency exchanges. Alex is passionate about spreading knowledge, introducing more legitimacy to crypto and stopping traders from losing money. If you reduce your losses, your profits will grow.
You can follow Alex on Twitter here.
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