When you short a cryptocurrency or any other stock, what you’re basically doing is earning money as the market value of that asset goes down. So, when you are shorting bitcoin, you will have to buy bitcoin from a broker, sell it at the current market price, keep the money and wait for the price of bitcoin to go down before buying more bitcoin for the same money. This way, you will take advantage of the bitcoin price falling in the market.
Usually, shorting is only used in the cryptocurrency marketplace, as the very features of every cryptocurrency allow its traders to short it and earn lots of money, even if the market value of a specific cryptocurrency is going down. Bitcoin, being one of the most valuable cryptocurrencies in the world, is also the most shorted one.
In this article, we will talk about shorting bitcoin and how you can earn lots of money through this method. Moreover, it will shed light on some benefits and drawbacks of shorting bitcoin and why you should or should not consider shorting it based on certain circumstances.
Shorting Bitcoin
The method of shorting bitcoin can easily be explained since it is very straightforward. as a trader, you have to sell your current bitcoin holdings and hold the money you sold it for until the market value of bitcoin goes down and you’re able to buy more bitcoin than you had before with the same money. This might not look like a direct way of earning money, but you’re essentially betting on the fact that bitcoin will appreciate beyond your selling price in the future, and you’ll get your money back with a profit attached to it. So, borrowing at a high price and returning at a low price will eventually make you money, and the process is called shorting.
By doing proper research, you can find lots of online platforms which will lend you bitcoin if you want to short it. Other platforms lend you the cryptocurrency in order to provide liquidity in the market and to make the trading process easier.
Depending on your knowledge of the cryptocurrency market and the risk you’re willing to take, you can use several different ways to short bitcoin. Some of the more popular options include but aren’t limited to Margin Trading, Futures Trading, Options, and CFDs.
Why Short Bitcoin?
While shorting bitcoin mostly depends on the mood of an investor, there also can be various reasons for it. Let’s take a look at some of the most valid reasons why a trader would short-sell bitcoin.
One of the leading reasons why traders really short bitcoin is because they do not believe in Blockchain and everything attached to it. Just because they like bitcoin falling in price, they bet against it and take profit while the bitcoin falls. Some traders even use social media platforms to spread fear amongst bitcoin investors and make them sell the cryptocurrency faster in order to make even more profit on their short positions. While this strategy does work for a short period of time, bitcoin eventually stands back and regains its market value.
Another reason for the shorting of bitcoin can be long-term sellers willing to hold onto their bitcoin and wait for its price to go up. Moreover, big traders open short positions with bitcoin in order to offset the loss they will have to encounter if the market goes down for some time.
Just like every other cryptocurrency, the value of bitcoin also keeps going up and down with time. A good investor would always like to take profit both when the bitcoin goes up and when it goes down in value. So, this is another reason why traders usually short bitcoin when the market is going down. This maximizes their profit.
How to Short Bitcoin?
After studying why traders want to short bitcoin, you should also learn about different ways of shorting it. Let’s discuss a few of the most common methods traders use to short bitcoin and take profit, even when it is going down in value. Keep in mind that there are lots of other matters to short bitcoin available on the internet as well, but they are used less often.
Options Trading
Just like the regular market, you can enjoy options trading in the crypto market as well. In this type of trading, two parties enter a contract with a set price and date. There are two different options available in options trading.
Call options are used when you think that bitcoin is going to gain value with time. This contract allows you to earn a profit when the value of bitcoin appreciates. Call options are used when the market is bullish.
Put options allow you to take profit as the value of bitcoin keeps lowering in bearish market conditions. This is the type of contract you should look for if you want to short bitcoin.
Inverse Bitcoin ETP
As you might’ve already guessed from the name, inverse Bitcoin ETP tracks the current market value of bitcoin and reflects exactly the opposite value. This option only provides you with profit if the value of bitcoin is decreasing in the real market. Because it goes the opposite way, it will provide you with profit when bitcoin enters the bearish market.
Spot Margin Trading
Spot margin trading is a feature provided by almost every cryptocurrency trading platform around the globe. In this method, you can buy and sell bitcoin with the leverage provided to you by the broker you are using. The settlement is instant, thus the name spot trading.
In order to become a sport trader, you will have to buy bitcoin and sell it back to the broker. Then, you will have to wait for the price value of bitcoin to decrease, so you can buy more of it for the same price. This will increase the number of coins you bought for the same capital and will eventually lead to a profit once the price recovers.
Spot margin trading is the easiest and the simplest way to short bitcoin and earn money. It is really simple to explain and get hold of, especially when compared to other methods mentioned in this guide. This type of trading is very commonly used by traders and can be accessed from almost every major crypto trading platform.
Futures Trading
In futures trading, you and the other party enter a contract to buy or sell bitcoin for a specific price and at a specific date. The terms of the contract remain unchanged, and the parties are required to obey the contract.
For example, if you want to short bitcoin in futures trading, you will have to place a sell order and set a specific price lower than the current market price of bitcoin. When that price reaches, your bitcoin will be sold to the buyer. You basically put the ideal rate at which you’ll buy or sell bitcoin to keep making a profit.
Moreover, buy orders in futures trading mean that both you and the other party agree that bitcoin will surpass its current market value and will make you a profit.
This type of trading, just like any other type, comes with its own dangers, and you are always at the risk of losing money. Almost every major crypto trading platform allows you to perform futures trading.
Shorting Bitcoin: A Step-by-Step Process
As we have already mentioned above, there are various methods you can use to short bitcoin and earn lots of money when the actual market value of this cryptocurrency depreciates. However, in this guide, we are only going to provide you with a tutorial on margin trading, which is one of the simplest methods of shorting bitcoin. But before you try this type of trading, you should learn about every possible way of earning money by trading bitcoin, as that will provide you with a better understanding of the market and how you can maximize your profits by doing what you love.
We’ve chosen Binance for this particular tutorial because besides being one of the biggest crypto trading platforms by volume around the globe, it is also trustworthy, easy to access from almost every country, has the most number of crypto pairs for trading, and has lots of other cool features which allow traders to short bitcoin.
Before diving into the steps, you’ll need to sign up with Binance by visiting their official website and going through all the prerequisites for opening a trading account with them. After getting registered, fund your account with the capital you want to start your crypto journey with and follow the below-mentioned steps.
Log-In
One of the most obvious steps you need to take before starting to short bitcoin is logging into your new Binance account. You can do so by either downloading their mobile application or visiting their website through the web browser of your PC.
You should always enable 2-factor authentication in order to make your account more secure.
Look For the Margin Trading Option
From the dashboard of Binance, look for the “Trade” option, and then proceed to the Margin Trading section. Moreover, the derivatives section will contain futures and options contract features.
If you are new to the margin trading dashboard for the first time, you might find all the details very intimidating. However, you do not need to master everything in order to start margin trading. All you have to know is trading pairs, how to select them, and how to understand the chart which presents you with all the data.
On the Binance futures trading platform, you will find out that the cryptocurrency pairs start with BTC/ USDT. You can also go through various other currency pairs and choose the preferred one.
While you can use any other crypto against bitcoin to short it, we recommend doing it against a stable coin like USDT, as this will make things easier. Most traders use USDT against bitcoin for futures trading.
After going through all of these options, you should visit the next tab and try to understand the data displayed by the graph. This will help you determine the buy and sell price for bitcoin. You should also determine a price point at which you would like to exit the trade to minimize your loss.
Add Funds
As we have already mentioned, you should have your balance account already funded with sufficient money to start the margin trading journey. If you already have money in your finance spot account, transfer it to your account. But before you can start using the margin trading feature on the platform, you will need to decide what type of margin trading you want to go with.
The first type of margin trading is the cross margin. In this type of margin trading, the risk is distributed amongst all of your open margin trading positions from your account.
The second type of margin trading is isolated margin trading. In this, the risk is limited to a specific cryptocurrency pair and doesn’t transfer to other open margin trading positions from the same account. Usually, this method is suggested by experts, but you can better determine your approach by calculating the risk and other odds.
For example, people normally use an isolated margin account. You can find it on the trading panel within the margin trading wallet. Look for the “Isolated” margin option there and click it. For isolated margin trades, you can avail up to 10x leverage from Binance. The leverage for cross-margin trades is only 3x.
Utilize the Selling panel since you’re making a sell trade to borrow bitcoin and short it by selling. Now go to the transfer option to explore what it has to offer.
First of all, make sure that Spot and Isolated margin wallets are selected in from and to sections, respectively. Once you select the BTC/ USDT pair, you’ll only be able to transact one of the currencies in the pair and nothing else. Specify the amount, and click to make the transaction. Binance doesn’t charge you anything for transferring between its own wallets.
Time to Make a Trade
Now that the money is in your margin wallet, it is the right time to make a trade. Since you are shorting bitcoin, you will need to borrow funds from Binance in your margin wallet in order to borrow more bitcoin and sell it to make a profit. You can do it by either borrowing the 10x leverage manually or by using the option to borrow the money automatically when the order needs to be executed.
Since you have to pay an hourly interest rate on the borrowed funds, we suggest using the automated borrowing option since it will only borrow the funds when the order needs to be executed. On the other hand, if you borrow the funds way before executing the sell order, you will have to pay interest on an hourly basis, and this will pump the interest you give on every trade.
Choose the Borrow option under the selling feature. After choosing the 10x leverage, your $100 will be shown as $1000 (your spot funds x 10). This means that Binance lets you borrow 10x the amount you already have for a specific hourly interest.
You do not have to always choose 10x leverage as that will increase the risk of loss significantly. You can borrow less money to decrease the risk, but that will also decrease your potential earnings. You can try with 5c leverage and less for the first few trades to try the feature out while remaining safe.
Once everything is done, all you have to do is click on the “Margin Sell Bitcoin” button, and you’ll start shorting bitcoin. Now, you have a short bitcoin position open. If you missed any of the steps or want more information, you can watch explanatory videos on YouTube.
In order to make good profits on isolation margin trades, you will have to learn how to study the market totally and open every trade after careful analysis. The stop loss feature is one of the best features available on the Binance platform, and you should certainly learn how to use this feature effectively and minimize your chances of losing lots of money.
Moreover, once the trade is executed and you take the profit, you will have to repay the loan manually. Even if you incurred a loss, you would have to return the borrowed money with an attached interest. For this, you will have to buy bitcoin and return it by going through a few simple steps in your isolated margin wallet.
Conclusion
The key takeaway from this guide is that while there are various methods of earning money by shorting bitcoin, you should choose the method which works the best for you after careful research and analysis. Moreover, you should choose trustable platforms like Binance and explore features like taking profit and stopping loss to minimize the risk involved in shorting bitcoin.
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