For those investors who suspect that bitcoin may fall in the future, shorting bitcoin can be an alternative. Do you want to know the method of how to short bitcoin? In this guide, we will tell you the step-by-step procedure of how to short a bitcoin.
Even nowadays, the bitcoin price keeps on fluctuating continuously. The coin historically fluctuated up to 40% during corrective periods, within an upward trend. Since the constant increase in the value of bitcoin opens trading opportunities.
One should take full advantage of this large margin on the trading platforms. If the opportunity knocks itself on the door, you can short bitcoin. In this article, we will walk with you till the end.
What does “Shorting” mean?
Short selling is a manner of investment, that makes money while the price of an asset drops. Though the bitcoin price trends are completely volatile, so you get many opportunities to go both, long and short.
However, one of the simple ways to short bitcoin is through a cryptocurrency margin trading platform. Several exchanges and brokerages support this type of trading. Thus allowing investors to ’borrow’ money from a broker, concerning carrying out a trade.
How does Bitcoin Short Work?
Shorting a bitcoin enables you to take an asset or financial instrument like bitcoin to sell it at its present price in the market. With long-lasting future contacts, you will be paying back the person you took from in the future and earn a good income in comparison.
To make your trade profitable, the bitcoin price needs to drop after you short it. So the meaning is that it will be cheaper to return the person whom you borrowed from. Take this example: You short 2 bitcoin when the price is $16,000. This means you borrowed 2 bitcoins to sell them for $32,000. The bitcoin price drops to $15,000 and you close your position.
Eventually, this is done when you repurchase the 2 bitcoin you borrowed at a lower price.
($15,000*2=$30,000) So your profit is $32,000-$30,000=$2000
You can also purchase your short trade with up to 100x.No doubt, this leads to an increase in the risk proportionally, but it also increases the chances of possible rewards or losses.
What Are Permanent Contracts?
A permanent swap contract also known as a ‘futures’ contract is an effective derivative contract that is sorted out in digital tokens like bitcoin. Every swap contract has a total value of almost 100USD. Utilizing these financial products on Bybit and Phemex, traders can long and short a financial instrument like bitcoin to gain profit from the asset’s decline or rise in price.
You can imagine that a perpetual contract has no expiry date. But funding is used to make sure that the perpetual price is based on the spot market. We used mark price to calculate a user’s unachieved profits and losses (UPL)to decrease the useless liquidation in the expected volatile market conditions.
Besides, Exchanges enable you to short and long bitcoin in the derivates market.
What Is The Method Of Short Selling Bitcoin?
To perform a sell order, you need to contact an agency or platform like Bybit, Phemex, Binance etc and Bitfinex (only for Americans).
Whereas, if you sell the above two bitcoins, by the time you will have to ‘cover’ those two bitcoins regardless of the bitcoin’s price.
Although, if the price increases it will become costly and you will have to pay more to close the contract. During short selling, the firm that lent the Bitcoin to you can also recall the loan on short notice. The contract does not close like this, but the ‘funding rate’ to stable the short position may differ depending on the market conditions.
As you will borrow bitcoin or US dollars to execute a transaction, you need to pay what we call a funding fee to the person you borrowed money from. Or else the lenders will get no rewards and the market will collapse.
Manage Risk When Shorting Bitcoin
Before short-selling it is necessary to take a look at the rules. As you know that the prices increase rapidly, and your short trade may get in danger. You may suffer a considerable loss like bitcoin’s price may increase then your entry price. For this reason, traders use a stop-loss function when they want to long or short bitcoin. One clear thing is that the trade does not always work according to your rules.
On the other hand, some people argue about the ethics of shorting a market, this is habitual with the stocks and bitcoin trading platforms.
Shorting While Using A Bitcoin Derivatives Exchange
Bitcoin exchanges provide a vast variety of financial products for professional traders. Some of them also permit leveraged shorting. Leveraged shorting means that you can take more money than you own while conducting a trade.
For example, if you want to sell bitcoin on a 2:4 ratio with $2000, then the exchange will let you borrow additional funds so you can execute a trade. Your short sell order is not three times higher ($6000) and is taken out against your capital. This creates a ‘liquidation price’ where your rank can be roughly liquidation if the trade did not go as per the expectations.
In most cases, traders use a range of risk-management techniques to alleviate potential losses while maximizing returns or at least breaking even. Leverage trading is extremely risky, and is not suggested to novice traders and investors.
Three Simple Steps To Acquire Bitcoin
1. Make An Account And Deposit Bitcoin
Make an account on Exchange to acquire bitcoin and crypto trading products. Sign up using your email address and set a strong password to access the bitcoin leveraged trading products. Afterward, add funds to your account.
You can do this successfully by clicking on my assets and clicking on deposit in the bitcoin section and sending bitcoin to your Exchange trading account.
2. Look For A Bitcoin Shorting Opportunity
Go to the ‘trade’ tab and click ‘BTCUSD’ under the Perpetual Contracts section so now you are in the trading terminal. When the terminal opens, you can use the various trading tools to work out the price of BTC in a given time frame.
These technical tools typically include the Relative Strength Index (RSI) indicator, the Moving Average Convergence Divergence (MACD) indicator, and many more.
Traders mostly mess around with these tools and modify them according to a particular trading style.
3. Locking The Target
You can define the limitations of your short position. Now, when everything is sorted, get ready to execute your first bitcoin order.
Does Shorting A Bitcoin Involve Risk?
Short selling any kind of asset is no less than a risk. Most probably, when you invest in an asset, your losses are restricted to the amount you invested in the asset. Since, for example, you put $20,000 in bitcoin and it suddenly fell and became worthless, your only loss will be $10,000.
But, if you are short selling your losses may go beyond your investment at the start. The 3:1 ratio (3x) mentioned before could extend your losses beyond what you put in the trade, which can liquidate your complete portfolio if not controlled carefully.
Though, it is a financial opportunity with a high risk that you need to only one short if you are confident about your trading strategy. The thing that is most important for you is to be confident when shorting bitcoin, especially on leverage. Many exchanges enable users to leverage trade at institutional levels with at least 100x leverage capabilities. The risk increases when the leverage increases.
Should You Short Bitcoin Or Not?
Bitcoin is of course the biggest technological transformation in money after the discovery of gold. Though, the global market still does not agree because of volatility and changings in its price every day. Till the market understands, gets knowledge, and figures things out, traders will get opportunities to both long and short bitcoin.
Shorting, in the long run, has not been approved to be beneficial for any person, keeping in mind the coin’s history of rising and falling actively. Yet, volatile moves to the downside occur more often, providing an opportunity for financial gain. Eventually, what goes up must come down one day, so there is no such specific strategy.
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