Short-selling is an investment method that allows investors to benefit from drops in prices and value of a particular asset, in this case Bitcoins.
Short selling allows you to basically borrow an asset, such as Bitcoins, to sell at current prices. Then, later on you can purchase the Bitcoins to pay back the person or organization you borrowed them from when selling the first time around. Hopefully when you go to repurchase the Bitcoins, prices will have dropped, so it will be cheaper to purchase the assets that need to be paid back.
Let’s illustrate this with a short example:
- You short sale (borrow and sell) 10 Bitcoins when the price was $1200
- This means you get $12,000
- Price of Bitcoin drops to $750
- You repurchase 10 Bitcoins to give back to the agency you borrowed from at 10*$750 = $7500
- Your total profit is $12,000-$7500 = $4,500
If you want to short sell Bitcoins, you will contact a trading agency or platform and place a short sell order. The agency will then sell the Bitcoins from their own supply, based on the assumption that in the future you will repay them with an equal number of Bitcoins. If you sell 10 Bitcoins, for example, you will eventually have to “cover” those 10 Bitcoins, whether prices rise or drop. If prices drop, it will be cheaper to rebuy these 10 Bitcoins. If prices rise, it will be more expensive.
When short-selling, the firm or individual who loaned Bitcoins to you can generally recall the assets at any given time and are required to give you only a short notice. So make sure you read any rules, regulations, or guidelines for “covering” any assets you short sell. With markets fluctuating at such a rapid rate, costs can swing wildly, putting you at risk. Short selling can be especially risky if the lender calls in the assets before prices have a chance to drop.
Short selling is actually very common with stocks and most major trading platforms allow you to short stocks. Some Bitcoin trading platforms now allow you to short-sell Bitcoins (e.g. AvaTrade or Plus500).
We should warn you, however, that short-selling any asset is a high risk venture. Normally, when you invest in an asset your losses are limited to the amount of money you have invested in that asset. For example, if you invest $10,000 dollars in a stock, and that stock suddenly collapses and become worthless, your losses will be limited to the $10,000 dollars you invested.
When short selling, however, your losses could extend far beyond your initial investment, something that is very important to consider, especially with Bitcoin. The easiest way to explain this is to use an example. Let’s say you short-sold $100 dollars worth of Bitcoin back when prices were only $10 dollars per coin. That means you short-sold 10 coins. Let’s assume that you have yet to repurchase the coins, meaning that you still have to pay the owner back with 10 Bitcoins. At current prices that would cost more than $12,000 dollars!
As you can see, short-selling any asset can be very risky. If you want to short sell Bitcoins or anything else, you need to be very careful. Only invest if you are very confident that prices will drop, and if you have money to cover your losses if investments rise. Make sure you watch prices closely and cut your losses if prices start to rise too quickly. That being said, if your intuition turns out to be correct and prices do drop, you could make a lot of money. If you short-sold a single Bitcoin that’s currently selling for $1,200 dollars, for example, and prices collapsed back to $100 dollars, you’d make approximately $1,100 bucks, and that’s not a bad pay day at all!