Short selling is when people can profit from an asset when its price is going down. In this article, we’re going to teach you how to do this with Bitcoin and a few things you will need to watch out for.
Summary of How to Short-Sell Bitcoin in 3 Steps:
- Visit eToro, sign up for an account, and verify it
- Select the BTC/Trading tool and choose “trade”
- Choose the “Sell” option and specify how much you want to sell
That’s pretty much the whole process of selling Bitcoin short. if you want a more in-depth explanation of what short selling is, how to do it step-by-step, and things you need to be on the lookout for, then keep reading. Here are some of the things we’re about to cover:
The sole purpose of this post is to explain what short selling is as a tool. You can use it in various markets including crypto and all we want is for you to have a better understanding of what it is.
1. What Does Selling Short Mean in Crypto?
Short selling (or sometimes referred to as shorting or simply “short”) is a technique used to earn from an asset even when it’s going down.
How Does Shorting Work?
Put simply, shorting works by allowing you to borrow from a broker or person so you can sell an asset like Bitcoin at a set price and buy it back. This means that you will be buying the Bitcoins at a later date and repaying the broker or person you borrowed them from.
The hope is that the price will have dropped by the time you have to repay the asset, in this case, Bitcoin. This way, it will be cheaper to buy the assets that need to be replaced.
Let’s look at a short example of how this is done:
You short sell 5 Bitcoins when the price is $4,000
This means that you’re borrowing 5 Bitcoins and selling them back at $20,000
The price of Bitcoin drops to $3,000
You buy the Bitcoins back at $15,000 and return them to the party you borrowed them from
You keep the profit $20,000-$15,000 = $5,000
2. How to Sell Bitcoin Short
If you want to sell Bitcoins short, you will need to use a platform or contact a trading agency so you can make a short sell order. This intermediary will then sell the Bitcoins from their own supply with the expectation that you’ll pay them at a later date.
This means that if you buy 5 Bitcoin, you will have to cover for them whether the price goes up or down.
If the price goes down, you will be able to buy those Bitcoins back at a lower price. But if it goes up, it will actually be more expensive and you’ll lose on the trade.
When you do this, know that the person or entity who loaned the asset can generally call it back at any time and is only required to give you short notice. So, you have to make sure that you read all the regulations, guidelines, and rules of how you’ll need to cover these assets.
Crypto markets are extremely volatile, which puts you at significant risk. Short selling can be particularly risky when lenders call back assets before they had the time to move down.
Selling short is a very common practice with stocks and most major platforms will allow you to do it.
Here are some of the ways that you can short Bitcoin:
Short Selling CFDs
CFD stands for Contract for Difference. With these, instead of borrowing, selling, and buying back the Bitcoin to repay the lender, you only have to worry about paying the difference.
With CFDs, you will be able to make money if the price drops without having to go through all the trouble of having to buy and sell Bitcoins.
eToro allows you to short sell Bitcoin through CFDs. All you have to do is sign up and verify your account then use the BTC/USD instrument to place a trade. You also have to make sure that you pick the “sell” option and not “buy”.
Shorting through a Crypto Exchange
You also have cryptocurrency exchanges that allow you to short sell Bitcoin, even with leverage. Leveraging means that you can borrow more money from the exchange than you actually own so you can maximize profits.
For example, you could have $2,000 on an exchange. If you trade with a 1:5 ratio, you can now sell $10,000 worth of BTC short (5 times what you have).
Using leverage is considered a very risky tactic since the exchange will close your trade faster than you can click if you’re losing since they know you’re playing with the house’s money. Leveraging magnifies both your wins and losses.
Some of the major exchanges that allow you to sell short include:
Specialized exchanges like Bitmex allow you to trade Bitcoin options. Options give you the ability, but not the obligation, to buy or sell an asset at a future date at a predetermined price.
This is a good choice for you if you already have experience with options. However, it is not recommended for beginners. Options trading can be complex but offers more leveraging and flexibility.
3. When is the Best Time to Short Sell?
Shorting Bitcoin means trading against a positive trend. The longer this trend continues, the riskier the trade becomes.
One thing you have to know is that the maximum profit you can make on a short sell is limited to a Bitcoin price of $0 while there’s no cap on buyers’ returns.
If you look at Bitcoin charts, you will soon realize that the old adage “prices take the stairs up, but the elevator down” is very true. Bullish moves tend to take a lot of time to materialize, but down movements tend to be relatively shorter and steep.
Trying to time a big bull run can be tough with Bitcoin. It’s likely that you'll stop out many times as Bitcoin keeps coming back like a stubborn zombie.
Also, if many traders took the same position, you could see a sudden price surge as scared traders compete to complete their short order (i.e. they all rush to buy back the Bitcoins they sold). This is referred to as a “short squeeze”.
How to use Market Analysis to Spot Short Selling Opportunities
It helps to know the Bitcoin market well in addition to knowing the basics of technical analysis.
Example of sell-offs triggered by past events:
- A major exchange failure
- Negative legislation in certain jurisdictions (the SEC cracks down on ICOs, “China bans crypto” fake news)
- Famous developers leaving Bitcoin’s development team (e.g. Gavin Andresen, Mike Hearn)
- Talk of hard forks (like Bitcoin Cash forking from Bitcoin)
- Setbacks and delays in major developments (Lightning Network, SegWit)
- Events that are expected to negatively affect the price:
- Any type of contentious hard fork
- Breach on Bitcoin cryptographic primitives (secp256k1, SHA256)
- Discovery of code exploits that could compromise the integrity of the network or the safety of wallets
- Governments taking hostile action against Bitcoin
- Any movement in the original 1 million Bitcoin or so mined by founder Satoshi Nakomoto
- Events that had little to no impact on price:
- Darknet market failures like AlphaBay and SilkRoad
- The identity of Satoshi Nakomoto being allegedly unmasked (Craig Wright, Dorian Nakomoto)
- Hostile forecasts by politicians, bankers, economists, journalists, etc.
4. The Risk Associated with Shorting Bitcoin
Short selling any asset is a risky venture. The amount of money you stand to make is limited to the amount of money that is personally invested in the asset.
For example, if you put $5,000 in an asset and it falls to zero, then your loss will be limited to the $5000 you put in.
However, when it comes to short selling, your losses can extend way beyond that point. This is something that is very important to consider, especially when it comes to an asset like Bitcoin. The best way to show this is through an example.
Let’s imagine that you sold $200 of Bitcoin short back when it was $20 per coin. That means you sold 10 coins in total. Now, let’s assume that you didn’t buy the coins back and still have to pay these 10 Bitcoins to the owner.
Now let’s imagine that the price of Bitcoin suddenly shoots up to $3,000, which can definitely happen with Bitcoin. This means that those 10 Bitcoins you sold are now worth $30,000.
So, as you can see, trading short with Bitcoin can be very risky. You will need to use extreme caution when using this method.
You should only sell Bitcoin short if you’re absolutely certain that prices will drop and that you have enough capital to cover for losses in case the price goes up. You also have to make sure that you closely monitor prices and know when to cut your losses if the price rises too fast.
Conclusion: Is Selling Bitcoin Short a Good Idea?
Short selling Bitcoin can be a powerful yet very risky way to make profits. Borrowing and selling Bitcoin when the prices are high and buying them back when they’re low gives you the opportunity to make money even if the markets are plummeting.
Shorting is usually not recommended for beginners because of the high level of risk. You should only short Bitcoin if you can afford to lose the money you put in. You also need to make sure that you are abreast of the most recent developments and events so you can participate in price movements.
Have you had any experience with short-selling Bitcoin you’d like to share? If so, then we’d love you to share them in the comment section below.