Short selling bitcoin or any other cryptocurrency is a way of making profit when the coin’s value drops. This investment option involves high risks and is best suited for experienced traders.
We explore the five different ways you can short sell bitcoin but first, here are the fundamentals:
What Short Selling Involves
It is essentially the process where you earn profit when coin prices dip. You borrow a coin so as to sell at current price. At a later date, ideally when the prices dip, you buy the asset again and repay your debt.
When the prices drop, the cost of repaying the debt becomes less than the original. But when the opposite occurs and the price increases, you make a loss while trying to repay the debt.
Is It A Good Investment?
The trade itself is a high risk activity as it involves trading against a long term uptrend. As witnessed by the various trading charts, cryptocurrencies take the stairs up and the elevator down. Meaning, you won’t notice when prices drop, but if you gamble correctly, you can pay it off lucratively.
Best Time To Short Bitcoin
It’s often difficult to predict the most suitable time to make a short trade successfully. However, you can use events affecting the industry to predict the drops.
An analysis of past events has proven that bitcoin’s price drops when regulations are tightened in major countries like china and when crypto exchanges fail and during delays in implementation of anticipated upgrades e.g. lightning.
Short selling is a gamble and you must be prepared to lose. To improve your odds, keep tabs with the latest crypto news and nature your chart reading skills.
Ways To Short Sell Bitcoin
Crypto exchanges: A handful of crypto exchanges allow shorting of bitcoin and sometimes other cryptocurrencies as well. Some exchanges also allow leverage shorting, a trade similar to margin trading. It allows you to carry out large trades even when you don’t hold the necessary funds. Exchanges like Bitfinex, Bitmex and Kraken offer variety of features like these.
Contracts for difference: These are advanced trading tools that don’t involve any buying or selling of any real bitcoin. Instead, you trade on contracts and value derives from the value of the coin. A number of online platforms like eToro and Plus500 allow you to short bitcoin through CFDs. The platforms have extensive features not just in crypto but traditional investing as well.
Futures: Bitcoin future are where buyer agrees to buy a security via a contract. The contract states the point at which the security will be sold. It is in the buyer’s expectation that the value of the security will rise.
Prediction markets: This market hasn’t been around the crypto industry for long. They offer the trader the opportunity to wager an outcome. Here’s what happens; you predict that the price of bitcoin will drop, if another person counters your bet, you profit if you turn out to be correct.
Bitcoin assets: It’s the most basic form of short selling. All you need to do is sell existing tokens on an exchange or a P2P platform, then wait for prices to rise again, then sell them.
Sometimes bitcoin prices vary considerably, that’s why it’s always a good idea to have multiple accounts across platforms when shorting.