With the cryptocurrency garnering attention in mainstream finance, the opportunities to short Bitcoin have multiplied.
Presented below are several methods to short Bitcoin effectively.
Those interested in shorting Bitcoin have a variety of investment avenues to consider. Shorting involves borrowing Bitcoin for sale, with the hope that its price will dip, allowing you to repurchase it at a reduced cost, repay the borrowed amount, and pocket the difference. Margin trading on specific crypto exchanges and derivatives like options or futures can provide short exposure. Bitcoin’s price is notorious for its volatility and sudden fluctuations, making short selling particularly risky in cryptocurrency markets.
Primary Methods of Shorting Bitcoin
Cryptocurrency exchanges offer one of the simplest avenues to short Bitcoin, with several well-known platforms supporting this approach.
Futures contracts in the Bitcoin realm require the buyer to commit to purchasing a security under a contract that defines its sale price and date. By purchasing a futures contract, you are betting on a price increase for the asset, securing a favorable deal for the future. Conversely, selling a futures contract indicates an expectation of Bitcoin’s price decline. Here, shorting Bitcoin becomes feasible by acquiring contracts that speculate on a price drop.
The climb in cryptocurrency prices by late 2017 saw Bitcoin futures trading gaining momentum. Today, they are accessible on numerous platforms. If accessible, you can engage with Bitcoin futures in this way. Notably, perpetual futures lack expiration dates, freeing traders from repeatedly rolling over their positions.
Clever Insights
In futures trading, selling a call option implies an obligation to transact at a predetermined price should the buyer act on the option. Profits materialize when Bitcoin’s market value drops below the set price before the option’s expiration.
Additionally, call option purchases (granting buying rights without obligation) or put option sales (requiring you to purchase if the buyer insists) offer potential gains but are complex strategies.
Betting markets in cryptocurrency mimic those in traditional financial sectors, where outcomes are predicted and profited upon. Predicting a specific decline in Bitcoin’s value can yield profits if the prediction holds true.
Despite its appeal, this option may not suit all investors. Should your anticipation of Bitcoin’s price dropping prove accurate, gains are feasible. However, the opposite scenario could result in significant loss.
If your brokerage or exchange accommodates, you might borrow Bitcoin to sell at a satisfactory price. Upon a price drop, repurchasing enables loan repayment. However, should the price move unfavorably, financial loss is a risk you must consider.
Bitcoin CFDs: A Parallel Strategy
Price disparities between opening and closing trades underpin the financial tactic known as a Contract for Difference (CFD), mirroring Bitcoin futures by essentially wagering on price changes.
Purchasing a CFD in anticipation of declining Bitcoin prices means speculating against the cryptocurrency, akin to shorting by expecting a downturn in value.
Knowledge of Order Types Is Vital
Before venturing into short positions with Bitcoin, it’s crucial to deepen your understanding of order types. For instance, utilizing such orders when trading derivatives can help mitigate losses if your initial predictions do not unfold as expected.
Bitcoin as an Asset: The Risk Factor
Shorting cryptocurrency like Bitcoin entails evaluating various risks beyond mere price fluctuations. Compared to well-established assets, Bitcoin’s relatively nascent nature—debuting in 2009—means there is scant data guiding investors in assessing its reliability as an asset.
While respected platforms such as CME offer safer Bitcoin derivative execution, newer platforms may initially appear technologicaly awkward and be more prone to security breaches.
The Dynamic Regulatory Environment for Bitcoin
Across the globe, Bitcoin regulations are gradually being refined and enforced. The U.S. has advanced through key legal cases and the introduction of Bitcoin investment tools. The European Union’s Markets in Crypto-Assets legislation offers a framework for member states to navigate cryptocurrency engagements.
Some leading platforms, like Deribit, face regulatory compliance challenges that exclude U.S. investors, complicating the landscape for those wishing to trade non-U.S. authorized derivatives or instruments, leading to unprotected trading conditions.