How to Short Bitcoin – A Beginner’s Guide
Last update: 11/20/18
Short-selling is an investment method that allows investors to benefit from drops in prices and value of a particular asset. This post will teach you how to short sell Bitcoin and what to look out for.
How to short Bitcoin in 3 steps:
- Sign up to eToro and verify your account
- Go to the BTC/USD trading instrument and click on Trade
- Choose “Sell” and the amount you want to short sell.
If you want a deeper explanation about short selling, how it’s done step by step and what to look out for keep on reading. Here’s what I’ll cover:
- What is short selling?
- How to short sell Bitcoin?
- Timing a short sell
- The risks of short selling
- Conclusion – should you short sell?
Short selling (often just ‘short’) is an investment method to make money over an asset’s price drop. Basically, shorting works by allowing you to borrow an asset, such as Bitcoins, and sell it at its current price. Later on, you purchase the Bitcoins to pay back the person or company you borrowed them from.
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 sell 10 Bitcoins when the price is $4,000
- This means you borrow 10 Bitcoins and sell them for $40,000
- Price of Bitcoin drops to $3,500
- You repurchase 10 Bitcoins to give back to the agency you borrowed from at 10*$3,500 = $35,000
- Your total profit is $40,000-$35,000 = $5,000
To short Bitcoins, you need to 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 short 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 buy these 10 Bitcoins back. If prices rise, it will be more expensive.
When short-selling, the firm or individual who loaned the 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.
There are a variety of ways to short Bitcoin:
Short Sell CFDs
CFD means Contract for Difference. It means that instead of actually borrowing the Bitcoins, selling them and then buying them back at a lower price you agree to just pay the difference. So in case of short selling you will get paid the difference if the price drops without needing to go through all of the hassle of buying and selling the coins.
eToro supplies a cryptocurrency CFD service that allows you to short sell Bitcoin. After you open and verify your account you can open a trade on the BTC/USD instrument. Make sure to choose “sell” and not “buy”. Here’s how it looks:
Shorting via a Bitcoin Exchange
Bitcoin exchanges geared towards crypto traders offer short selling options, and some allow for leveraged shorting too. Leveraged shorting means you can borrow more money from the exchange than you actually own there, in order to buy the Bitcoins you want to short.
For example, if you have $1,000 on the exchange and you leverage on a 1:3 ratio you can now short sell up to $3,000 (3 times of what you have). Leveraging is considered very risky since if things don’t go as you intended, the exchange will close your trade sooner than you expected (because they know you’re using money you don’t really own). In other words, leveraging magnifies both gains and loses.
Major exchanges that allow you to short sell Bitcoin include:
Certain specialized exchanges, such as BitMEX, offer Bitcoin options trading. Purchase of an option grant the ability, but not the obligation, to trade at a specific price by a certain expiry date. If you have experience with options trading this method might suit you, otherwise it’s not recommended for beginners. Options are complex but do allow for greater flexibility and higher leverage.
IF you time it right… Shorting Bitcoin is trading against a long-term uptrend; the longer you the trend remains, the riskier this becomes.
One thing to remember – the maximum profit potential of a short is limited to a Bitcoin price of 0, whereas buyers have no limit on their profit.
If you examine Bitcoin price charts, you’ll soon realize the truth of the old trading aphorism, “price takes the stairs up but the elevator down.” Whereas bullish moves take time to build and develop, bearish moves tend to be relatively short and sharp.
Trying to short the top of a big bull run is tough; you’re likely to stop out multiple times as Bitcoin keeps rising like a stubborn zombie.
Keep in mind that if many traders are positioned similarly, a price surge may result as fearful traders compete to close their shorts (i.e. they buy back the Bitcoins they sold). This is known as a short squeeze.
Analyzing the market for Short Sell Opportunities
Beyond technical analysis, it helps to know the Bitcoin space well. For reference here are different type of events and how they affected Bitcoin’s price.
Past events that triggered major sell-offs
- Failure of major exchanges.
- Hostile regulatory action in major countries (eg. “China bans Bitcoin” fake news, SEC clamps down on ICOs).
- Well-known developers quitting the Bitcoin development team (eg. Mike Hearn, Gavin Andresen).
- Heightened hard fork risks (eg.Bitcoin forking into Bitcoin Cash).
- Delays or setbacks in widely-desired upgrades (eg. SegWit, Lightning Network)
Events expected to have a negative impact on price
- Any contentious hard fork.
- Breach of the cryptographic primitives used in Bitcoin (SHA256, secp256k1).
- Discovery of Bitcoin code exploits which threaten wallet security or network operation.
- Hostile actions against Bitcoin by the governments.
- Movement in the first million or so bitcoins mined by Satoshi Nakomoto.
Events which have had little impact on price include
- The failure of darknet markets, eg. Silk Road or Alpha Bay.
- Claims of having unmasked the identity of Satoshi Nakomoto (eg. Dorian Nakomoto or Craig Wright).
- Hostile pronouncements from journalists, economists, politicians, bankers, etc (see our Bitcoin Obituaries section for over 300 times Bitcoin has been proclaimed dead).
I should warn you 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.
Now let’s assume that all of a sudden prices went up to $4000, which can definitely happen with Bitcoin. This means you that the 10 Bitcoins you need to pay back will no cost you $40,000!
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 at $20,000 dollars, for example, and prices collapsed to $5,000 dollars, you’d make approximately $15,000 bucks, and that’s not a bad pay day at all!
Shorting Bitcoin is a great but risky way to make money. Through the act of borrowing Bitcoins, selling them when the price is high and then buying them back when the price is low, you can earn money even when markets are bleeding.
Usually shorting isn’t recommended for traders who are just starting out because of the high risk it involves. If you do decide to short Bitcoin make sure you only invest money you can afford to lose. Also, make sure to stay up to date with current related events so you can anticipate any change in the price direction.
Have you had any experience with short selling Bitcoin? If so, I’d love to hear about it in the comment section below.