The crypto market has hit an astonishing $267 billion as of May 2020. More and more traders are looking for means to maximize the industry and profit from it. One way traders can profit from the Bitcoin market is by Shorting.
While it might seem like a weird idea to a newbie to ‘Short bitcoins, it simply means selling bitcoin at a lower price. We all know that the first trading mantra you'd hear as a newbie is ‘buy high-sell low.'
However, with shorting, you are selling bitcoin in the hope that it will fall in price, and you can buyback. Traders are selling the difference in market price. A newbie must learn how to short bitcoin before venturing in.
The first thing that anyone who wishes to venture into Bitcoin shorting needs to set right is their motivation for going into this aspect of trading. Bitcoin shorting relies on predicting a bear market for bitcoin.
So, if you look at Bitcoin from the point of view that it will drop in price, you need to be kept up to date with the happenings in the market.
For some traders who short bitcoin, they do so as a means to hedge against loss. So in learning how to short bitcoin, your initial motivation matters a lot.
Quick Guide: How to short Bitcoin on Bitmex
Where to Short Bitcoin- Top 5 Exchanges
When a trader shorts Bitcoin, he aims to profit from the expected decrease in the value of Bitcoin. So, traders buy a certain amount of bitcoin on credit from an exchange with the aim that when bitcoin falls in price, they'd be returning the exact amount.
That means if you get 10 BTC from the platform to short BTC, you'd have to rent 10 BTC when your order goes through. To avoid making a loss, you have to be sure that your analysis is correct.
There are different ways to short bitcoin, and we shall be taking a look at them briefly.
Short Selling Bitcoin
There is also the option of shorting bitcoin on the open bitcoin assets market. Traders can short bitcoin directly and sell them off at a price they are okay with and then wait for the price to decline and repurchase them.
It could be as simple as shorting bitcoin on an exchange when it is high; the trader converts it to USDT and then buys them back when it declines, thereby getting more BTC. There is a high chance of losing your BTC while shorting, and there is also the possibility of making profits.
One of the common ways of shorting Bitcoin is margin trading. Investors borrow money on margin trading platforms and sell at market price. Investors buy back the BTC when the price drops and returns the exact amount they borrowed while keeping their profit.
Future trading has to do with buying an asset with a contract that states the price at which the investment will be sold at a future date. With Bitcoin Futures trading, an investor buys a BTC futures contract with the aim that the price will rise in the nearest or later future.
When the price increases, you can buy the BTC at a pre-agreed price, as stated in the futures contract, which will significantly be lesser than the current market price.
Binary Options Trading
With binary trading, traders are allowed to choose between put or call options. An option contract allows a trader to determine to buy or sell BTC at a particular price in the future.
With the call option, the trader gets a call option contract that will facilitate the right to buy bitcoin at a future date while the put option allows you to sell the bitcoin contracts at a future date with the use of an escrow account.
However, where shorting is concerned, traders utilize the put option contract.
Ever since the inception of bitcoin, predictions have been made on whether it was a bubble or not or whether the price was going to come crashing. You can also use prediction markets for shorting BTC.
All a trader has to do is to predict the percentage or price by which bitcoin would decline and get others to take a bet on it. If bitcoin declines by that price or percentage, the trader receives a profit.
If you are looking for exchanges to short Bitcoin, the following exchanges will allow you short bitcoin and make profits with ease.
Best Exchanges to Short Bitcoin
|Kraken||Rating: 5 |
|Binance||Rating: 5 |
|Bitfinex||Rating: 5 |
|Poloniex||Rating: 5 |
Step-by-Step Guide to Shorting Bitcoin
Unlike regular bitcoin trading where you buy and sell using stop loss, Bitcoin Futures trading is a bit different. In this section, we shall be looking at how to short bitcoin on exchanges and how to short crypto in the US.
How to Short Bitcoin on Binance
Step 1: Create an account on Binance:
Visit binance.com/en to create an account if you do not have one already. Put up your password and get verified by providing the necessary documents in the “verification button” also put on your two-factor authentication (2FA).
Step 2: Carry out Market Analysis Using Indicators and Charts
Analyze the market through charts and indicators. As a newbie in crypto, try using the “Basic Exchange” window. You can use the Binance charts to determine price trends.
The Moving average (MA) indicator opens automatically, and you can easily detect the downturn trend on Binance through the red bars, an indication that the price is about to go down.
To predict prices, it is better to look at the price trend a week before and sometimes a month before to predict the next decline.
Step 3: Create a short order
Binance gives you two wallets, one for the exchange and one for margin trading. Go to your exchange wallet and transfer BTC to your margin wallet. Click the ‘margin 3x' button to get an overview of your wallet.
Move to the margin trading page and select the asset you want to short, in this case, BTC. You can choose to 3x or 5x leverage your asset or decide to borrow and repay. You can borrow the amount of BTC you want to trade on the sell-side and input the amount you wish to sell at.
Step 4: Monitor the Behavior of the Market
Remember that you are trading with borrowed BTC, you have to watch the market behavior. This is why it is essential to use a stop loss to help prevent losing all your funds.
Step 5: Close Order and Take Profit
After watching the market closely, close order when BTC price drops to the predicted price and repay the borrowed BTC. Depending on your verification tier and volume, profit might range from 0.012% to 0.10%.
How to Short Bitcoin on Kraken
Step 1: Create an Account
Create a Kraken account on https://www.kraken.com. Ensure you verify and update the 2 Factor Authentication for your account.
Step 2: Fund Your Account
After verification, send the desired asset (BTC) to your account to act as fund collateral. Go to ‘Funding' on your dashboard to do this. As soon as your funds arrive, click on the ‘Trade' tab on your dashboard, which will take you to the ‘Kraken Pro' option.
Step 3: Place your Shorting Position
To select the trading pairs, Click on the ‘Markets' tab in the top left corner, and you will get your desired asset pair, in this case, BTC/USD. Set the specific order with a limit order at a particular price.
You will get a prompt to set leverage. Specify the number of units you want to sell and the price at which you want to enter the position. You can also set the timing for the position.
If the order is not filled by the time the timing window expires, the order will be closed automatically. Click on the Sell button to review your order, then click on ‘Confirm' to add it to the order book.
Step 4: Set Your Stop Loss
Stop-Loss protects you from making losses if the market goes against you. To set your stop loss, create a buy order of equivalent volume as your sell order through the ‘Buy' tab.
Click on ‘Stop-Loss' along with leverage and enter the quantity of bitcoin and the price your position should close at to prevent losses. Then set the time frame and click on buy to confirm your stop loss.
Step 5: Take Profit
To take a profit, create a buy limit order with the exact volume as the shorted bitcoin and at your target price. Click on the ‘Buy' tab, select ‘Limit' as the other type, and choose the same leverage as your shorted position.
Ensure that your closing order is the same as your open position. Leave leverage at the same level as you were creating the short order. Specify the price at which the trade would be closed automatically when the price declines.
Set the time frame for the trade and click on buy. Close your position using ‘Market' order instead of limit order to get the best available price and take your profit.
More Information About Shorting BTC [FAQS]
What is the Best Time to Short Bitcoin?
You can short-sell Bitcoin, but you can only buy at a time you are sure that the price of BTC will fall back to the price you predicted. There is no particular best time; you just have to do your analysis and be sure that the trend does not go against you.
Are There any Risks Involved in Shorting Bitcoin?
There are several risks involved in shorting bitcoin. This is because you are placing a bet that the price of BTC will drop sometime in the future. Trends may not go as planned, and you may suffer a loss.
There may also be a price spike that may cause liquidation; rollover fees might kill the rate of your probability if the price remains stable.
There are also risks involved in the leverage rates you use, as a high leverage rate may make your liquidation price rate close to the initial price you began with.
When it comes to making investments, you have to be careful because there are always risks involved. You must possess sufficient knowledge before you begin trading. There are many bitcoin options involved in shorting, and you can choose from different trading and investment methods. Bitcoin shorting can be done anytime, but if you are unsure of your predictions, it is best not to get into it.
Also, you should start with lower leverages like 3x or 5x instead of using 10x or 20x as you might get liquidated faster. Short selling Bitcoin has a lot of profit-making potential as the price of Bitcoin fluctuates a lot. Learning how to short bitcoin is easy; the slight difficulty newbies might encounter lies with getting the right market analysis and the right exit strategy.