How to Short Bitcoin — A Guide to Shorting BTC
By Peter Jack on The Capital
In the passing years, crypto traders have started realizing that apart from simply investing and trading BTCs, there are several other ways to earn money from it. From mining and holding to writing about BTC and doing micro jobs such as completing a survey, etc., all these methods can help you earn profits from Bitcoin.
There is another, less-known way to earn profit with Bitcoin known as Shorting Bitcoin. Many crypto users wait for this opportunity to gain profits. So, in this guide, you will know about what is Shorting Bitcoin and 5 ways by which you can optimize shorting Bitcoin for a higher return.
What Does Shorting Bitcoin Mean?
Shorting Bitcoin is the process of selling the cryptocurrency with the hope that when its value falls, you can buy it back at the lower price. By doing this, traders earn the profit of difference in the market price. In simple words, you can understand it as an investment method to earn money over a digital currency’s price drop.
Here, the motto is to buy low and sell high. Basically, you borrow the coins with the commitment to return them sometimes later. Then, you sell the coins at the current market price, knowing that the price will decrease in the near future. And when the price lowers, you buy the coins back and return them to the lender. Now, what you earn as profit is the difference between the selling price and the price at which you bought them back.
Also, the difference price can be a profit or loss. Therefore, the short-selling technique is carried out when you firmly believe that the asset’s price will fall for sure. That is why there is quite a lot of chances of making huge profits in this highly volatile market, especially, in digital currencies such as Bitcoin.
How to Short-Sell BTC?
In order to short-sell BTC, you need to connect with a crypto trading platform where you can place a short sell order. After this, the trading platform sells BTC coins from their own supply on your behalf, so that you will repay them later with the same number of coins. If you place the order of short selling 12 BTCs, you will have to return them exactly 12 BTCs, irrespective of whether the price goes up or down.
If the price of asset declines, it will be easier to buy these 12 coins back. But if the price increases, it will be much expensive. Make sure to read the rules, regulations, and guidelines of the firm and individual from whom you are borrowing the BTC coins.
Ways to Short Bitcoin
Learn about various ways by which you can make shorting Bitcoin a profit-making process. Following are the 5 most famous ways:
This is one of the easiest ways to short bitcoin. Many cryptocurrency exchanges allow for shorting BTC through margin trading. With margin trades, investors borrow money from a broker for making a trade. Or this may also involve borrowing a specific number of BTCs from a lender and selling it at the market price. When price will decrease, the borrower can buy back the BTCs and return the exact borrowed amount to the lender and keep the profit earned between the sale and purchase prices.
Bitcoin also has a futures market. In brief, when a buyer agrees to buy an asset with a contract which defines at what price the asset will be sold at a later date, is called Futures Trade. When you buy BTC futures contract, you assume that its price will rise in the future. So, later on, when the price will increase, you can buy BTC at the prefixed price only (as mentioned in the futures contract) which will be less than the current market price. This makes sure that you will earn a good profit on the asset in the future.
When you sell a BTC futures contract, it is assumed that BTC’s price will decline. So, when the price will go down in the future, you can sell the coins at the prefixed rate of Bitcoin (as mentioned in the futures contract). This will again help you in earning profits by not selling at the present market price which is lower than the predetermined price.
Binary Options Trading
This is an option contract which enables to choose between call or put options. A binary options contract allows traders to have the right to buy or sell BTC coins at a particular price and date in the future. In this, the call option contract enables traders to buy an asset at a future date, and put option allows for selling the asset at future date.
To short BTC, traders execute the put option contract, likely with an escrow account. This states that they will sell BTC at the current price even if the price goes down later on.
Prediction markets can also be considered for shorting BTC. This lets traders predict the market and bet about the result of the events. A trader could predict the market and say that BTC’s price would decline by some percentage. Then if anyone takes him/her up on the bet, and the price actually declines then the first trader earns a profit.
Short Selling Bitcoin Assets
This is one of the easiest ways to earn profit by selling BTC coins on the open digital assets market. Traders interested in buying and selling actual BTC could short-sell the coins directly. Crypto owners simply sell off the coins at a price they are comfortable with. They then wait until the asset’s price declines and when it happens they buy back the coins again. If the price does not move as you want, you can lose the money or the BTC coins. But there are high chances that traders earn money from the difference between the sales and purchase prices.
Hence, you are now ready for shorting Bitcoins. Although this article has explained clearly how to short and ways to short BTC, it is still essential to know that it is a risky business as you are predicting the market. A deep understanding of the market and learning about the factors affecting the crypto’s price can help in reducing the risks and therefore, eliminating the chances of losses.