There’s no denying that Bitcoin is one of the most volatile assets in the world. While volatility may turn more risk-averse investors away, it means there’s room to profit in both bullish and bearish markets if you know how to properly short the asset. Here’s how to short Bitcoin in 2020 and beyond.
First things first, what does it mean to “short” an asset?
Short selling is an investment method for making money when you expect an asset’s price to drop.
George Soros is famous for his short investment against the British pound. Now, Soros is sometimes referred to as the “Man Who Broke the Bank of England.”
In all reality, he did not break the bank but rather joined others who were heavily shorting the currency as they saw the British government hike up inflation rates into the teens during the days leading up to Black Wednesday.
Those who shorted the currency anticipated that the price of the currency would go down. As a result of their actions, the currency had to be pulled from the European Exchange Rate Mechanism.
Short = Borrowing Money from a Broker
Shorting Bitcoin means that you are simply borrowing money from a broker (usually a company but sometimes an individual) to purchase a stock. More specifically, when you are taking a short position, you are taking from the exchange’s internal supply with the expectation that you will return the same number of Bitcoin, stock, or what-have-you back to the exchange.
Here is another example:
Imagine you short sell 20 Bitcoin when the price of Bitcoin is $10,000. You sell them and this brings you $200,000 while leaving you 20 Bitcoin short. Bitcoin’s price drops from $10K to $8,000.00. Now, you see your chance to rebuy the Bitcoin at a lower price and gain $40,000 in total for your efforts. See, it’s not so hard to imagine an answer to the question “how to short bitcoin?”
Trading Bitcoin: Short vs. Long
A short position is obviously a direct distinction from longing a stock. When you long a stock, you are anticipating that the price of an asset will go up over time. This is what most people traditionally do when they invest.
For example, the traditional investor will develop an investment thesis, then go out and buy X shares of Peloton with the forecast that Peloton will go up to Y amount in Z time.
But how is it done in the cryptocurrency world?
Six Different Ways to Short Bitcoin
There is more than one way to short Bitcoin. Depending on your aptitude for risk, your level of patience, and the initial amount of money you’re willing to spend, you can find a short-position investment strategy that you mesh with.
From the more traditional bet on Nasdaq with the Bitcoin Investment Trust, to a binary trading option on an exchange like Kraken, there are many options to choose from (pun intended).
For the record, this is not financial advice. Do your own research!
Margin Trading
When you margin trade, you’re using borrowed money to open a larger position than you would have otherwise been able to do with your own funds.
For example, Kraken will directly lend money to a trader. The trader will open a position with that cash, then once the position is closed, the trader will repay the short back to Kraken.
Here are some of the best places to Margin Trade Bitcoin:
Prediction Markets
Prediction markets are a newer way for executing options on how to short Bitcoin, but the platforms are quickly growing in popularity. On a predictions market, you can demonstrate that you think Bitcoin will fall by a certain percentage or margin by a certain date. Another person in a predictions market can take you up on that bet. The bet is then locked-in on the platform.
Here’s a good resource to discover the top Bitcoin prediction markets.
Sell a Bitcoin Futures Contract
Like other assets, Bitcoin has a futures market. In futures trading, a buyer agrees to purchase a security with a contract. The contract specifies when and what price the security will be sold at. If you buy a futures contract for a higher price than what it is currently being traded at, that is usually associated with a bullish mindset. If you plan on selling a futures contract, it suggest a bearish mindset. Think about it, why would you want to sell a contract for less money than you expect it will be worth in the future (unless of course you needed the cash)?
Here are some of the best places to sell Bitcoin futures contracts:
Binary
The word ‘binary’ very simply means two things when you’re talking about how to short Bitcoin. You enter a trading position with a binary (two-sided) outcome- yes or no- that answers the question “Will an underlying asset be above a certain price at a certain time?” For example, you can predict the price of Bitcoin will fall below $7,300.00 by 12/15. Yes or no.
If the binary trade wins, you win the money, however, if the binary trade loses, your entire investment is lost. There are only two possibilities.
Directly Short-selling Bitcoin Assets
This is also not recommended for the faint of heart or those who already have trouble sleeping. A trader can short-sell currency directly from their own account by buying tokens at one price, then selling off tokens at the low-price they are comfortable with. This is the infamous “buy high, sell low” strategy that all desire to trade with. It can also work when answering the question ‘how to short Bitcoin.’ While this option is not as complex as some of the others, complexity isn’t everything. Less is more might apply here.
Short the Bitcoin Investment Trust
Traded on NASDAQ, the Bitcoin Investment Trust (NASDAQ: GBTC) tracks Bitcoin’s market price, then theoretically follows in price alongside it. The trust allows people to short and long Bitcoin without having to actually invest in the currency and while using more traditional financial trading systems.
In Closing
The price of the Bitcoin market is always changing, and when it’s going up, you know it could only go up for so long. When some investors see clear signs that the market is going south, then they often short the market or bet on the market’s downfall.
A short position is a much different strategy than longing the market. Then, even within short positions, there are at least six different ways you can bet on Bitcoin’s downfall. The strategies vary based on your aptitude for risk.
When it comes to tracking the performance of your portfolio, CoinStats has one of the highest-rated apps available on iOS and Android.
Good luck and happy trading!
The post How to Short Bitcoin in 2020 (Top 6 Ways) appeared first on CoinStats Blog.
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