How To Short Bitcoin: Complete Guide
Bitcoin is dancing around the $9,000 USD mark currently, and while some traders are talking about a bull run, others are thinking about a possible fall in price and wondering how to short Bitcoin. When a trader goes short, they are hoping to profit in the fall of an instrument’s value.
If a trader had gone short Bitcoin in late December 2017 they would have made a great profit when they covered the short in 2018. There weren’t a lot of ways to effectively go short Bitcoin in 2017, but today there are loads of good ways for people to profit from the fall of the world’s most popular crypto.
Shorting a volatile financial product can be very risky because the theoretical losses are unlimited. There is no limit to how high the price of Bitcoin can go, so it is very important to manage your risk if you decide to short Bitcoin.
Short Bitcoin Positions are Easy
There are numerous exchanges that now offer Bitcoin linked derivatives, and many crypto exchanges now support short selling. If you are looking for a way to profit from a falling Bitcoin price, there are lots of options for you.
Bitcoin CFD Brokers
The rising popularity of cryptos has given way to numerous CFD brokers adding Bitcoin contracts to their offerings.
Most Contract For Difference (CFD) brokers are living in the fiat world, so you will have to fund your account with some kind of major fiat currency. CFDs are derivatives, which means you will be trading in a financial instrument that has zero backing in Bitcoin.
On the plus side, it is extremely easy to fund an account at most CFD brokers, and many have super-low minimum deposits. You should be able to set up an account in less than a day, and only have to deposit a few hundred dollars to get your short positions open.
EagleFX allows you to trade CFDs for a range of Cryptocurrencies, read our full review to find out more.
One thing to be aware of when you trade in any kind of derivatives is the financing rate. When you go short Bitcoin with traditional CFDs you will have to pay a percentage of the position to keep it open.
Depending on the financing rate, it may make more sense to look into another option, especially if you plan on holding your short Bitcoin position for more than a few days. There are more reasonable exchanges out there, but you will have to enter the crypto universe to access them.
Crypto CFD Brokers
Another option for short Bitcoin positions is an exchange like Bitmex. Much like the existing Fiat currency CFD brokers, Bitmex offers CFD products on Bitcoin. Unlike fiat CFD brokers, Bitmex accepts Bitcoin (and only Bitcoin) for deposits and has much better terms for crypto short sellers.
Instead of paying to short Bitcoin, short-sellers on Bitmex are actually paid on a daily basis when they short Bitcoin. There a few different ways to short Bitcoin, including perpetual contracts that have no expiration dates, and futures contracts that will expire on a given date.
Exchanges like Bitmex or Deribit are probably much better choices to short Bitcoin for people that already have some BTC in their portfolio, as the terms that these crypto-based CFD brokers are far better than their fiat CFD counterparts.
Sell Bitcoin Short on an Exchange
There are a number of crypto exchanges that now support margin trading and also short selling. Unlike Bitmex, the amount of leverage that can be used is much lower and is generally no higher than 5x.
It is impossible to say which option would be a better fit, although lower leverage is always going to mean less risk. The most important things to consider are the fees that an exchange charges to hold a short position and their trustworthiness as a counterparty.
Binance, Huobi, Poloniex, and Kraken all support margin trading and short selling. There are other exchanges that could be used to establish a Bitcoin short and offer a range of other trading options as well.
The Futures Market
The CBOE/CME introduced Bitcoin futures in late 2017. right before the Bitcoin price fell off a cliff. These futures are still trading and can be accessed by any normal brokerage account that can trade futures contracts.
Futures contracts are a little bit different from a regular short sale. A futures contract has both a given price and an expiration date. This means that time becomes an important part of the pricing structure, which may not be intuitive for every trader.
For example, you could short Bitcoin by buying a futures contract (called a put) that gives you the ability to sell Bitcoin at $10,000 by a given date. If Bitcoin is trading above $10,000 when the contract expires, it would have no value.
The time value of a contract decreases as it approaches the expiration date, so buying long-dated futures can be risky. Paying for a lot of time can make sense when there is a big move coming in the markets, but trading in futures that will expire soon is somewhat safer.
Much like the CFD contracts that fiat brokers offer, the futures contracts that trade on the CBOE are cash-settled, which makes them less attractive to traders who want exposure to actual cryptos, not derivatives that exist within the fiat currency system.
Go Short with Tracker Funds
European investors have the ability to short Bitcoin by selling Bitcoin ETNs that trade on the Nasdaq OMX. The Nasdaq OMX is based in Stockholm and offers Bitcoin ETNs that are denominated in either USD or EUR.
An Exchange Traded Note (ETN) is similar to a CFD, but it trades on a public exchange, not with a proprietary broker. The ETNs are cash-settled and would be bought and sold via a brokerage account.
Exchange traded Bitcoin ETNs fill a similar niche to the futures contracts that trade on the CME. These contracts are a good option for institutional investors who need to stay in the fiat system and have to deal with established counterparties.
Managing Risk With Short Sales
Selling short comes with risks that shouldn’t be overlooked. When BTC prices shot above $5,000 USD earlier this year, there were calls for a fast decline to new lows. Clearly, that didn’t happen, and BTC prices more than doubled from the $5,000 USD level.
If a trader had shorted BTC earlier this year and didn’t use stop-loss orders, they would be sitting on some major losses. Platforms like Bitmex have built-in safeguards that will liquidate a position once the margin is lost, but it would be wise to have sell orders that kick in before the emergency liquidation levels are hit.
It is a very good idea to decide on how much you are willing to lose when you open up a trade and put in stop-loss orders that will keep your margin safe. BTC prices may fall back to where they began the year, but there could be higher levels coming before the crunch.
If you want to short Bitcoin, be careful. There are many ways to gain short exposure to Bitcoin, but the market is volatile.
Make sure you understand how to manage risk before you trade, and also that you understand how different instruments work. The psychological side of short selling can be challenging, especially in a market that can double in less than a year!
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