How To Short Bitcoin – MarketsXplora's guide to making money on BTC downtrends
The fluctuating trend seen in the crypto sector in 2022 has led many investors to decide to start shorting Bitcoin in the hope of being able to profit, somehow, from this situation. In fact, when the value of Bitcoin plummets, selling short (or shorting) is one of the most used methods to save one's savings.
The less experienced, however, could be confused by concepts such as shorting. Earning while the value of an asset decreases can rightly seem counterintuitive. That's why our team of experts decided to compile this quick introductory guide to the world of Bitcoin short selling.
In the course of the article, Markets Xplora will explain the fundamental points of shorting, i.e. what it is and how it works in practice. Then, a quick fundamental analysis of the crypto market will be presented, in an attempt to understand the reasons behind this collapse. Later, the best methods for investing in cryptocurrencies with Bitcoin shorting will be shown to our readers, for example through crypto exchanges.
If you are interested in the topics of this short guide, our advice is to read the article to the end to discover the world behind short selling.
What does “Short Bitcoin” mean?
Shorting, more technically called "short selling", is a widely used practice within financial markets of all kinds. It consists of betting downwards against a certain asset and therefore allows you to generate a profit when the price of the asset decreases.
The underlying concept is one of the foundations of macro-economics: when the value of an asset decreases, it is the best time to buy it. The trader who "shorts", in this case, takes the place of the seller (broker) by borrowing the asset and collecting the money from the sale. As soon as the price falls enough, the trader buys back the asset and returns it to the seller (broker), and therefore makes money as the value of the asset falls.
This is why the term "short sale" is used, because, in effect, you are selling an asset that you do not own.
The concept of shorting can be applied to any financial instrument, whether it is traded virtually through derivatives such as CFDs or whether it is actually traded on the markets. In this sense, it is also possible to short sell cryptocurrencies, and this obviously also includes Bitcoins.
As we will see better later, in fact, cryptocurrencies are among the financial assets - together with Forex currencies - that are best suited to practices such as short selling. In fact, these can be carried out both through CFDs and through real possession. Obviously, in the latter case, it is also necessary to have one of the best crypto wallets that are able to keep your tokens safe.
How does Bitcoin short selling work?
How short selling works is much simpler than you might initially imagine. Nowadays the best cryptocurrency platforms allow users to easily access the market if their intent is to short Bitcoin or other cryptocurrencies.
However, that doesn't mean that shorting Bitcoin is a strategy to be taken lightly. As often happens, here too there are hidden risks and pitfalls that could seriously jeopardize the capital you have decided to invest. Therefore, it is necessary to understand how it works without relying exclusively on the automatisms of the platforms to invest successfully online.
As already mentioned in the previous paragraph, the concept of short selling is based on the economic assumption that sales increase as the price decreases. For this reason, when deciding to short Bitcoin it is necessary to keep in mind some principles:
Profit is inversely proportional to the value of the asset
This means that in order to make money, the market price of Bitcoin must fall
Remember that just as the value of an asset cannot always increase, it cannot always decrease.
To avoid over-short exposure, set tools such as Stop Loss and Take Profit.
With these few tips in mind, you should be able to navigate the world of short selling as well. You will thus be able, with the right and due constancy in informing yourself, to generate profits even when the market is down.
Shorting Bitcoin – Fundamental Analysis of the Industry
Before you start investing through short selling, it might be worthwhile to delve deeper into all the various causes that have led hundreds of thousands of investors to short Bitcoin in the last year. In fact, the value of this cryptocurrency decreased significantly during 2022, going from around $46,500 in January to $15,000 at the end of the year.
The causes behind such a substantial decline can be many. The first months of 2022 were marked by the financial market crisis that had been dragging on since the end of 2021 due to the increase in raw material costs.
However, when the price stabilized again in early February, the outbreak of war in Ukraine led to other important changes in the crypto market. Many investors have preferred to leave their positions on digital currencies for fear of inflation and have focused on other markets they say are more favorable.
Then there was the Terra (LUNA) crisis, the collapse of Three Arrow and Celsius. Finally, FTX collapsed in November and this affected several companies such as BlockFi, Salt, and Genesis, leading to a strong feeling of distrust among cryptocurrency investors.
Much of 2022, therefore, saw many investors sell their Bitcoin to safeguard their capital and start focusing on other trading strategies such as betting on commodities and doing ETF Trading. The sale of a large amount of Bitcoins has caused a drastic decrease in the value of the crypto.
This collapse led to two very different events:
A sharp increase in strategies aimed at shorting Bitcoin so as to be able to profit even from a bear market situation. Just think of how having started shorting Bitcoin at the end of January, to date an investor would have recorded over 250% profit on the initial investment.
The situation in the crypto market has paved the way for a number of new and innovative projects focused on Decentralized Finance (DeFi). These projects would be ready to give new life to the market and there will be an opportunity to deepen the discussion later in the guide.
How to short Bitcoin on an exchange
One of the most common techniques to use if you want to short on Bitcoin is certainly to refer to the features offered by a cryptocurrency exchange. Through these large market operators, it is possible to short sell cryptocurrencies.
Those who use the services offered by an exchange usually actually own cryptocurrencies in their digital wallet. On the best cryptocurrency exchanges, in fact, it is possible to operate directly and actually on the market using the cryptocurrencies in one's possession.
But how can you short Bitcoin without the aid of derivative instruments?
The answer is very simple and, in some ways, it is even more intuitive than what could be done with the services offered by brokers. Simply, if you believe that the price of Bitcoin is close to a decrease, you can sell your tokens (all or only in part, it's up to the individual to decide) and, if your forecast turns out to be correct, buy them again at a reduced price time decreased.
It may be useful to see it with a concrete example: imagine you have 1.4 BTC in your wallet. In anticipation of an upcoming fall in the value of the token, you decide to sell all your reserves at the market price of around $20,000 for each BTC. Therefore, by the time the sale is completed, around $28,000 will have been raised.
Now, let's say that a few weeks after the sale, as expected, the value of Bitcoin drops by 25%, up to $15,000 per token. A farsighted investor, at this point, could buy back his 1.4 BTC by paying only $21,000. Therefore, once the transaction is completed, you would have generated a profit of around $7,000 by playing on the short sale of Bitcoins.
As you can see, therefore, it is possible to short Bitcoin even through exchanges that do not offer tokens in the form of CFDs.
Should you short Bitcoin?
As you have already read in the previous paragraph, shorting Bitcoin is obviously not something to be taken lightly. Indeed, if operated superficially this strategy risks seriously endangering the funds allocated for trading, risking uncovering your entire investment.
Therefore, below, we briefly propose the main advantages and disadvantages associated with the short selling of Bitcoin. By doing so, you should have the tools necessary to identify and circumvent all the main dangers associated with this world and, at the same time, leverage its advantages to increase your profits.
Pros and cons of shorting Bitcoin
Possibility of profit in a negative market
Applicability to numerous markets (crypto, forex, stocks etc)
Use of both real and derivative instruments
Risks related to volatility in the cryptocurrency sector
As can be easily seen from the table just above, the short sale of Bitcoin can be seen in diametrically opposite lights, and in principle the advantages and disadvantages are equivalent. This makes the choice of shorting Bitcoin or not decidedly personal, linked to the needs and abilities of the individual trader.
If, in fact, on the one hand, you can count undeniable advantages such as the possibility of making a profit even in bearish market situations which would otherwise be impossible. Or the fact of being able to short sell not only Bitcoin but also a wide range of other small cryptocurrencies in which to invest both in a real way (by owning them) and through derivatives (CFDs, Futures, Binary Options).
On the other hand, doubts and obvious risks also inevitably arise. The fact of having to "lose to gain" could be counterintuitive for many novice traders and reserve them with unpleasant surprises in the setting phase.
Similarly, the world of cryptocurrencies is still highly uncertain and the worst enemy in this is undoubtedly the market volatility. In the space of a few hours, prices could skyrocket or sink almost without warning, neutralizing millions of euros of investments on the market or causing them to grow exponentially. To this must also be added the nebulous situation relating to the regulation of the crypto market on which international bodies are slow to express themselves.
Shorting Bitcoin – Final Thoughts
In the course of this article, we have had the opportunity to broadly illustrate the main aspects related to the short sale of Bitcoin. In fact, shorting Bitcoin has become a tactic used by an increasing number of investors, especially following the crisis in the crypto market that took place in early 2022.
Whether you choose to rely on an exchange to short your Bitcoins, it's always good to keep in mind that this is an activity that involves all the risks involved. Despite the possibility of earning even during negative market phases, the risks of volatility and overexposure are always present.
To reduce your risks, you could turn to well-proven strategies, such as using CFDs, Leverage on the crypto market, or some of the best inverted ETFs such as etaPro Bitcoin Inverse ETF and 21Shares Short Bitcoin ETP.
Shorting Bitcoin – Frequently Asked Questions
What does Shorting Bitcoin mean?
"Shorting" is a term used in financial jargon that indicates betting on the decrease in value of a certain asset. In the case of Bitcoin, therefore, it means that the investment will be successful if the value of BTC decreases over time.
How does Bitcoin short selling work?
The concept of "Shorting" is based on the economic rule of the increase in demand as the price decreases. Many brokers and exchanges offer specific tools and features to allow investors to earn by betting on the decrease in value of a certain asset.