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How To Short Sell Bitcoin? - Beginner's Guide In 2020
Onyeka
2020-02-21 629


In the mind of every businessperson, there is the concept that profit can only be acquired when one acquires an item and sells it when it adds some value.


Would you believe it if someone told you that you could make profits by selling something when it loses value?


Well, today, you will learn that this is possible through bitcoin shorts what we refer to as shorting Bitcoin. This is a relatively new and legal investment option that can be as lucrative as any other good business venture if properly applied.


Let’s look at what it is, and how to deploy it in the real world.


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How Does Short Sell Bitcoin work?


Before we go into the topic, let’s have a short history of Bitcoin and why it is a perfect instrument for this new investment strategy.


Bitcoin is the most popular cryptocurrency in the world right now. It caught the attention of everyone when it shot from its introductory value of about $1,000 in 2017 to slightly over $19,700 in 2017.


People rushed to buy and hold it hoping it would continue with the same trend. To their surprise, upon reaching the $19,700 figure, it began a sharp decline and has not been near that high again. As at the time of this writing, 1 BTC is worth about $9,600.


For the person that understands market trends, they can tell just how much Bitcoin fluctuates (moves up and down). 


That said, we can say that for those who wait for its value to decrease so they can buy it cheaply and sell it when it is higher, they have been making profits off this cryptocurrency. On the other hand, there is another unique group that has been waiting for the value to decrease so they can make potential profits from shorting Bitcoin. 


So, how exactly does short selling Bitcoin work?


Bitcoin Shorts vs Longs


1. Bitcoin Shorts 


In the world of currency trading, “shorting” or “going short” simply means to sell something. 


But, can Bitcoin be shorted?


A simplified outline of how shorting would work is explained below:


> Let’s say that you believe the price of Bitcoin will drop in the next few days or weeks.

> So, you buy 5 Bitcoins at, say, $5,000 per coin. That means you have spent $25,000.

> Sometime later, the price of one coin drops to, say, $4,000. If you were to sell the coins at the current price, you would have $20,000.

> Surprisingly, instead of making a loss of $5,000, you would have made a profit of that amount!


We are going to look at the specific ways of making these profits when the price of Bitcoin decreases later in this post.


2. Bitcoin Longs


Bitcoin longs are the direct opposite of Bitcoin shorts. In short, this time, rather than sell the coins when the price decreases, we sell them when their value increases.


Long selling Bitcoin adheres to the typical concept of business where you acquire something cheaply, then, when its value increases, you sell it and make some profit.


Long selling would work as follows:


> Let’s assume that you think the price of Bitcoins will increase in the near future.

> So, you purchase 10 coins at a price of $5,000 per coin.

> After some time, the price goes to $5,900.

> If you sold the coins at the new price, you would make a total profit of $9,000.


Long selling is straight-forward as you can just buy the coins directly from any platform or person, hold them until they increase in value, then sell them. As for short selling, you need a trading agency or broker. You will understand this a little later. 




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Why Short Bitcoin?


1.    Investment via Price Prediction


As you will find out in the next sub-topic, there is a method of making money known as forex trading. Here, you make money by speculating on the prices of commodities.

 

In short, you only need to deposit money and say whether the price of Bitcoin will go up or down. In our case, if you say that the price will decline, then you will make money if your prediction is true.

This is one of the best and newest ways to make money off Bitcoin's short selling.  

 

2.    Supplementing Bitcoin Mining


In Bitcoin mining, three factors determine the profit that a person makes:


§  The cost of the mining hardware

§  The cost of electricity, and

§  The current value of Bitcoin

 

Out of the three above factors, only the price of Bitcoin fluctuates enough to cause a significant effect on the profits. Therefore, when the price of Bitcoin drops, so does the profits made.

 

Due to this, it is common to find Bitcoin miners simultaneously short selling the coin. The point here is that in case the value of the cryptocurrency drops, they will cover the losses from the profits made from short selling it.

 

3.    Hedging against a Bitcoin Long Position


In trading, there is an investment approach known as hedging. This is whereby you had opened a trading position but it is making losses.


>   For instance, let’s say you had placed a trade expecting the price of Bitcoin to go up. Unfortunately, the price goes down instead.


>   So, once you realize that the market is likely to go down further, you open another bigger trade saying the price will decrease.


>   If you are right, then the new trade will make more profits the first trade which was in losses. In the end, you will have more profits than losses, or close without any loss at all.

 

4.   Profiting From Arbitrage


The final way that short selling Bitcoin is useful is in arbitrage trading. This is yet another investment approach, although hard to come by.

 

>   To do it, an investor needs to identify two platforms offering Bitcoin at different prices.


>   Let’s say we have platform “A” is offering Bitcoin at $5,000 while platform “B” is offering it as $5, 050.


>   The arbitrage trader will take notice of this and immediately purchase Bitcoins from platform “A” and sell them in platform “B.”


In this way, the trader will have made a profit of $50 per coin.


7 Complete Ways to Short Sell Bitcoin


1)    CFDs


Contract For Difference, CFD, is one of the most popular online trading methods. This is where, instead of purchasing the real Bitcoins from an exchange (platform), you make profits from the variation in exchange rates between the coin and Fiat currencies such as the USD.

 

To do this, you need to be trading a currency pair known as BTCUSD. If you think that by exchanging BTC into USD you will make some profits, then you exchange them and keep the profits. In CFDs, this is known as shorting or selling the BTC.


CFD is a way of leveraged trading, so you need to understand the risks before start to sell bitcoin CFD.

2) BTC Exchanges


Some Bitcoin exchanges offer a special investment method known as leveraging. This means that they allow you to borrow more money than you actually hold in the exchange. By doing so, you can buy more coins and sell them to make more profits than you could make with your original sum.


Leverage multiplies your original capital by a defined ratio. If you choose a leverage of 1:5, then it means you can borrow up to five times the amount you have in the account. Therefore, you can now buy more coins and sell them when you think it is profitable while making much more from a small initial investment.


3) Arbitrage 


Arbitrage trading is a fast and easy way to profit off Bitcoin short selling. As highlighted earlier, you only need to identify two platforms that tend to offer the coin at varying prices. One should offer it at a slightly higher or lower price.


You need to be very fast to be able to make money through this method. So, you find that one platform is offering BTC at $9,000 while the other is buying it at $9, 030. You quickly purchase the cheaper coins in the first platform then immediately sell them on the second platform.


If the difference is enough to cover any transactional costs and leave some profit for you, this can be a perfect earning opportunity through Bitcoin shorts. 


4) Options Markets


Options markets are very interesting, not to mention almost risk-free. 


This method allows a person to purchase something (BTC in our case) at a certain price then sell it at a pre-determined price after a defined time.


So, you might purchase some BTC options worth $10,000 and agree with your provider (broker) to sell it after 2 weeks. After 1 week, if the price of Bitcoins has decreased to, say, $8,000, then you can buy the coins at that price and execute the options contract. In this way, you will have made a profit of $2, 000 from the decline in price.


On the other hand, if at the end of 2 weeks, the price increases, rather than add more funds to pay the broker, the contract will auto-execute at the pre-determined price of $10, 000. As such, you will not experience any loss.


5) Futures Contracts


Futures contracts are somehow similar to Options. However, this time, the buyer or seller legally commits to purchase or sell an asset at a specific amount on a specific time in the future. In this case, you want to be the seller since you are looking for a decrease in the value of Bitcoin.


You, therefore, get into an agreement with a broker that if they sell you X Bitcoins today, they will purchase them at a certain amount on a specific date. When that day arrives, if the price of BTC will have decreased, then the broker will pay you the pre-determined amount. The difference between the purchase and selling price will be your profit.  


6) Binary Options


Binary options are an emerging market that is closely related to forex trading. Here, you do not purchase or sell actual coins. Rather, you only need to “bet” on the direction of the price of Bitcoin after a specific duration.


So, you commit an amount such as $100 and the broker promises to add a certain percentage, like 75%, if your price prediction is true after X seconds, minutes, hours, days or months. In your analysis, you think that the price will have decreased in the next 2 hours.


You then commit the $100 and wait for the 2 hours to expire. If you were right, then it is considered a “win” and the broker pays you a total of $175. In the event that you were wrong and the price increased, then you lose all the $100.


7) Prediction Markets


Prediction markets give investors the chance to predict and bet on the results of future events then they reward them accordingly.


For example, a broker might ask, “Will the release of a new cryptocurrency cause the value of Bitcoin to increase?” 


The investors, depending on their analysis or belief, need to purchase shares. They can buy as many as they want. 


In this case, if you think the price of BTC will reduce, then you purchase as many shares as you want. If the outcome of the event makes the price to decrease, then you can redeem the shares and make some profits. 


When to Sell Your Bitcoin?


You stand better chances of making money from Bitcoin shorts if you have some knowledge about financial markets and forex trading. This is true since you have some edge in analyzing and making your predictions.

 

Short selling is tricky because, as per the rules of the markets, the price of BTC can never go beyond 0. As such, you are limited to how much you can sell. On the other hand, buying BTC has no limit since the coin can go as higher as possible.

 

Therefore, you should only sell when you think that there are sufficient reasons for the value of the coin to decline. You can learn some market analysis tools or link up with expert finance professionals to help you in making your Bitcoin short selling decisions.

 

In addition, make sure to start selling as soon as you see the masses selling. Do not be caught selling when the majority of people are buying the coin. The high fluctuation rate of Bitcoin can leave you in serious losses within a very short time.

 

Risks of Short Selling Bitcoin


1) Regulation 


Short selling Bitcoin is legal in most countries. However, there is always the risk of touching anything related to Bitcoin in that the coin is highly unregulated.  This is because unlike Fiat currency, it has no central control and monitoring point. Therefore, getting scammed when transacting with it means no one will intervene on your behalf. 


In short, when dealing with BTC, you are on your own.


2) Opposing Buying Trends


Short selling Bitcoins will most likely pit you against buying pressure most of the time. Most investors, more so those that trade without any financial expertise, tend to keep buying the coin with the hope that it will rise someday and reward them.


As such, you will find that the coin makes more upwards moves than declines. Being caught on the wrong side when these big moves start can leave you in big trouble.


3) Fluctuation


Fluctuation is a double-sided knife. It can make you rich in a very short time. Similarly, it can make you bankrupt just as fast. This is mainly because of its high fluctuation nature which makes it move up and down very fast and without warning.


Therefore, when you have active Bitcoin shorts, you should be keen to watch out for potential [sudden] upward moves. Otherwise, you risk making nothing or losing everything.


4) Liquidation


When doing bitcoin leveraged trading, you are usually trading using borrowed money. This becomes risky especially when your short selling positions are making losses as opposed to profits.


After your positions lose value up to a certain level, known as a margin, the broker might automatically close all your active positions. When this happens, the positions are closed in the negative and you cannot recover the money without depositing more capital.


Conclusion: Should I Short Sell Bitcoin in 2020?


You can short sell Bitcoin any time you want, but you must possess sufficient knowledge about the method that you choose to apply. 


All forms of financial investments come with the risk of losses. These risks are multiplied even further when one is trading instruments like Bitcoin that fluctuate a lot, or when you use leverage. These two factors can see a profitable venture turn ugly very fast. As such, to be safe, you should only venture into a form of shorting Bitcoin that promises more profits than losses.


All in all, short selling BTC offers more trading and earning opportunities since we can now make potential money by taking advantage of decrease in the prices of Bitcoin. 


Start shorting now!

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