To be able to understand how you can short Bitcoin, you must first learn about the definition of shorting. Short selling occurs when a trader borrows some assets from the broker and immediately sells them in hopes of the market shunning more deeply and the asset shedding its price, and when it happens, they immediately buy it back at a lower price and then give these assets back to the broker and keeps the profit as a difference. This is what short trading is all about. People do it in forex as well as stocks and even commodities, so why not crypto?
It goes without saying that the crypto market behaves a bit differently than the stock and forex market, and this market is driven by extreme volatility. It also means that the prices of assets are going to be extremely fluttering at times, you might be able to see a huge rise in the price of an asset at a given moment, and then the very next day or hour, you are seeing that very asset kissing the ground in an extremely unpleasant way.
When the markets are falling, it means that investors are losing money, but some people, the extreme professionals who prefer bear markets on top of a bull market, know how to benefit from them. They endorse an inverse trading method that is known as shorting, and this phenomenon is used to earn from the price drop that is taking place for a dedicated asset.
Today we shall be talking about Bitcoin, the flagship cryptocurrency, and how you can short Bitcoin to earn huge bounds of profit from it. It is not a secret anymore that Bitcoin is doing extremely poorly, and in the open market, the price of the asset is falling like pieces of domino stacked well together, and a little flutter from the wings of a butterfly projects the whole structure into the dust.
Introduction to Bitcoin Shorting
There are plenty of ways that you can use for the sake of shorting Bitcoin, but all of them impose the element of betting against the market and especially when everything is being a downtrend. To initiate the process of Bitcoin shorting, all you have to do is borrow some Bitcoin tokens and sell them before you think that the price is going to fall.
When the price actually goes under, you buy those tokens back at the premium lower cost and return the tokens to the lender, but you keep the difference as a profit to yourself hence turning a huge chunk of money from a dwindling crypto market.
Anyway, proceeding further, you must know that shorting is an extremely risky form of trading; you could end up losing everything that you have poured in as a means of investment. But if you pull it off the way it is supposed to be, then you are in for a treat and big chunky profits. You must have the right knowledge and strategies up your sleeves and not to mention experience with this kind of trading if you seriously want to make a living out of it.
Bitcoin shorting is a type of trading in which you bet against the long-term uptrends of Bitcoin. You really assume that the market is going to fall even more, and as you propel with this trend, you continue to borrow Bitcoin tokens from a broker and sell them off right before the price is about to go down, only to buy them later on and to give these back to the broker.
But since you have bought these at a lower price, you keep the difference as a profit and return the tokens to the broker; this way, everybody wins, and you have made yourself a huge chunk of money.
The only difference that Bitcoin shorting has from traditional spot trading is that you first have to sell the tokens and then buy them back to turn up a profit. It is a rather unique and intelligent way of making money in the crypto market, especially when the bear market is in full flux and doesn’t seem to be chipping away or interchanging itself with a bull market anytime soon.
How Does Bitcoin Shorting Work?
First thing’s first, if you really want to engage with Bitcoin shorting, the first step that you need to do is to acquire the coin. To be able to do so, you need to connect yourself with the critical trading platform which would allow you to place a short sell order. After that order is executed by the deeds of the miners and based on how significant the order was, the platform will lend you that particular amount of bitcoins that you requested.
Next, a smart contract will be drafted between you, the receiver of the token, and the crypto exchange, the lender stating that you will return the same number of bitcoins that you are borrowing from the exchange at a later date. They won’t be troubling you at all for the profit that you might have made until you return the same amount of Bitcoin tokens that you took. This right here is your opportunity to earn a significant profit on Bitcoin as an asset.
One thing that you need to know before succumbing to this type of trading is that you could turn a huge profit, or you could turn a huge loss which is why it is the riskiest trading out there. It doesn’t matter if you turn a profit or a loss; you have to return the same amount of Bitcoin to the crypto exchange, and if you don’t there are going to be penalties, and you’re not going to like what they are. Make sure that you make the most out of these different ways to short Bitcoin, which can be a great help moving forward.
Margin Trading
Margin trading, without any doubt, remains the most common way to short bitcoin as an asset and is supported by various centralized changes such as Coinbase, Binance and Kraken, and many others. You can also call this method ‘leveraged trading,’ which perfectly fits the definition and the mechanism of this type of trading.
It allows you to trade Bitcoin tokens even if you don’t have the full amount of money you require to buy or borrow a particular amount of Bitcoin tokens. Using this kind of leverage, a trader or investor would be able to increase their investment opportunities because they will be getting an extra amount of funds from the crypto exchange they’re using for the trade, which would ultimately allow them to meet a much bigger stake against the market.
You don’t have to have the amount of money on you to be able to get benefit from leverage trading, and it allows you to place an order that is many times higher than the original amount that you have got on yourself. But then again, after everything is said and done, you have to return the original amount or the issued number of crypto tokens that you have taken from the crypto exchange in the first place.
The very idea behind this type of trading is that you get higher exposure and therefore return on your investment even if you only have a small amount of money on you. In events of a successful margin trade, you would not only be able to return the equal amount that you borrowed for leveraged trading, but the profit that you would be able to earn would certainly be off the charts than what you would have earned using your own money.
You should not get all giddy up in this approach because even if you are getting a higher capital and turning a huge profit, the risk factor and losses are as significant as the profit itself is.
Bitcoin Futures Shorting
If you want nothing to do with the traditional methods of shorting Bitcoin, then you would really like a new and growing market of derivatives that are Bitcoin futures or options. This is a very plain concept, but you need to understand it right now if you wish to make something out of it; here, you are actually betting on price changes for dedicated assets such as Bitcoin but in the future.
You pick a date, and you say that around that specific time period, the price of Bitcoin is going to be this closer to a specific value, and if you’re right, you win big, but if you are wrong, then just like the traditional financial trading methods such as margin trading or leverage trading you lose big.
It is one of the fastest growing markets in the financial sector that has surely attracted the attention of a lot of institutional investors. You can buy Bitcoin at a predetermined price for a specified time in the future. You are actually betting in favor of the market and are saying that at that particular time period, the price of Bitcoin, which is the asset that you have bought at a predetermined price, will actually rise.
And when that happens, the contract that you have signed for the acquisition of Bitcoin will allow you to have the asset at that specific predetermined price which is definitely going to be lower than the one which was made available in the future. It is like buying something that is presently worth $10, but in the future, it is going to be $1000 but what you do here is that you pay a $10 price even when the price of the asset has been kicked all the way to $1000, that is the beauty of Bitcoin futures shorting.
The above examples shall fill you up regarding all the required attributes of future trading, but when it comes to Bitcoin futures shorting, it works completely differently. When you are selling the Bitcoin futures contract, you are expecting that the flagship cryptocurrency will drop in price in the future.
The contract that you have signed will allow you to sell the Bitcoin at a predetermined price which will not be lower than the future price. You are actually selling Bitcoin at a profit even when, in the future, the market is at a loss. It is a rather complex game and not that easier to comprehend but eventually, you will be able to make some sense of it because it is the exact opposite of traditional futures trading.
CFDs Shorting
The contracts for differences is yet another form of derivatives that have become extremely popular in new European markets and is opting for a global reach. These allow strangers to benefit from the overall momentum or price action the asset is receiving at the moment without having to own or have the assets in their possession at all.
This is actually a bet that is placed between the investor as well as the CFD brokers, which would allow both of them to speculate the price of the asset within an agreed-upon time frame. Neither the broker nor the trader has to keep the asset in their possession and will continue generating revenue from it based on the speculation they are set on in terms of price change.
Another great benefit of these types of contracts is that there is no specific end date, you can have an end date to terminate the agreement if you like, but generally, the contract can be kept untouched or open for as long as you want.
These types of contracts are easily available and extremely less complicated to open as compared to the features agreement and what these might require. You will be amazed to know that just like margin trading, leveraged positions could be instilled within these types of contracts as well, which means that a trader would be able to bet a lot higher than their official position or balance at hand. This makes these kinds of contracts extremely riskier and therefore are not the first choice of beginner investors neither should hover towards these.
Bitcoin Options
The option contracts are yet another significant derivative type available on the crypto market, and these are growing exponentially besides the futures derivatives. Both of these were developed to manage risk on a better note. This is the type of contract which would allow both the traders and investors to buy or sell Bitcoin tokens at a predefined price on a specific time period in the future.
There is a general difference between options contracts and futures contracts, and the difference is that the options contracts do not have any obligation to be fulfilled on the agreed order. This is because investors or traders who are putting down their money have the general ability to withdraw themselves from a contract at any given time, but to do so, they will be charged a particular amount which is called a premium, to be able to avail that particular position.
There are various crypto exchanges out there that would allow you to put options on Bitcoin futures or the token, in general, so it is essential that you do a bit of your own research to find more about this type of trading. It is generally more complicated than leverage trading or margin trading, or even the CFD derivatives, which is why you need to be a professional or a player in the market to be able to connect or explore put options Bitcoin shorting derivatives.
Bitcoin Prediction Markets
There is another method that you can use for the sake of shorting Bitcoin, and that is through the Bitcoin prediction market. These kinds of markets are also known as the betting markets, and these allow the user to create an event for the sake of placing their bet on the price of Bitcoin regarding a future outcome.
The traders could be able to get accurate results regarding if the price of Bitcoin is going to drop or if there is going to be a subtle rise in the next coming months. Whatever the outcome may be, if the trader has guessed the outcome right within a definitive percentage for either price drop or rise in the price, then they are going to be rewarded with tons of profit that seems unlikely to come in any other potential derivatives market for Bitcoin shorting.
There are exactly two people involved in this kind of activity, one trader has to bet on the price being dropped in the near future, and the other one has to choose the side where the price is only going to increase. This is how prediction markets for Bitcoin work, and it is an incredible way to short the flagship cryptocurrency if that is what you are after. You don’t need much capital or too much experience to have a go at this amazing opportunity.