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How To Short Bitcoin – A Guide To Shorting Cryptocurrency

How To Short Bitcoin (and other cryptocurrencies)

How to Short BitcoinThere are a number of investors who believe that Bitcoin is likely to crash at some point in the future.  How to short Bitcoin is worth understanding and learning if you share that belief. You can short-sell almost any cryptocurrency, not just Bitcoin. What goes up must come down, and you can actually profit when any investment, including Bitcoin, drops in value. The number of venues and ways in which you can short Bitcoin has multiplied.  The cryptocurrency’s increasing spotlight in mainstream finance may actually be sowing the seeds of its downfall.

Shorting an investment is a rather straightforward process–at least in terms of the actual trading. The tough part is figuring out your investment play.  And then, actually generating a profit as the value of the investment rises or falls. It is not something you want to try without sufficient knowledge. However, the good news is that you don’t need to be an expert. Anyone can learn how to benefit from short-selling stocks, securities, and cryptocurrencies.

Bitcoin’s price remains rather volatile and many analysts suggest that its recent ascent is unsustainable.  With a potential impending fall, it is a good opportunity to understand how to sell short. Another aspect to consider is that governments throughout the world are actively monitoring crypto exchanges and cryptocurrency investments. Authorities are concerned about the possibility of tax evasion because of its anonymous character.

Short-Selling Bitcoin Assets

This technique may not be for everyone.  However, individuals with the fortitude for it can profit if their gamble pays out. Sell tokens at a price you’re comfortable with, then wait for the price to decline before buying them again. Of course, if the price does not shift as you anticipate, you risk losing money or losing Bitcoin holdings.

Short-selling Bitcoin comes with fees as well as hazards. For instance, you’ll have to pay escrow or Bitcoin wallet fees to keep the bitcoin safe until the deal is completed. You’ll also have to deal with the volatility of Bitcoin’s price. You might lose a lot of money if the price goes up rather than down, as you intended. Certain exchanges also provide leverage for such transactions. The disadvantage of utilizing leverage is that it has the potential to compound earnings as well as losses.

In other words, the danger associated with using leverage rises in tandem with the possibility of profit. Applying leverage to your trades is a high-stakes bet that isn’t for the faint of heart.  If your deal doesn’t go as planned, the losses may be disastrous. As a result, leverage trading is usually only suggested for seasoned investors. Leverage trading, on the other hand, can be a profitable technique for these experienced investors. The choice to trade derivatives using leverage is based on your personal experience and comfort level with the related risk.

How To Short Bitcoin – Margin Trading

Most traders prefer to purchase a stock or cryptocurrency at a lower price and sell it at a higher price. This is called going long on an asset. When it comes to selling short, you just do the opposite. Shorting is the practice of purchasing Bitcoin or another asset at a high price and then selling it at a lower price. To enter a short position, you need to borrow cryptocurrency and sell at the current market price on an exchange. Then you have to go back and buy the cryptocurrency and refund the money you borrowed. You benefit from the difference between the selling and purchasing prices if the price reduces when it’s time to refund your funds.

A cryptocurrency margin trading platform is one of the simplest methods to short Bitcoin. Margin trades enable investors to borrow money from a broker in order to conduct a transaction.  This activity is permitted by many exchanges and brokerages. However, trading on margin entails borrowing money in the form of Bitcoins.  This leverage can either significantly raise earnings or seriously aggravate losses. Currently, several Bitcoin exchanges support margin trading, with Kraken and Binance being two prominent choices.

How To Short Bitcoin – Futures Market

A Bitcoin future is an agreement to buy Bitcoin at a certain price in the future.  A futures market exists for bitcoin, just as it does for other assets. A buyer agrees to acquire a security with a contract that defines when and at what price the security will be sold in a futures trade. In a futures contract, you may either be the seller or the buyer.

  • Buying a futures contract – When you buy a futures contract, you are essentially going long.  You’re wagering that the security’s price will grow, ensuring that you’ll be able to sell it for more later.
  • Selling a futures contract – When you sell a futures contract, you’re indicating a negative attitude.  You are anticipating that Bitcoin’s price will fall. In this case, you can short Bitcoin by purchasing contracts that bet on the cryptocurrency’s price falling.  You then close out your position by buying later at a lower price – and pocketing the difference.

Bitcoin futures trading exploded at the time that cryptocurrency values were skyrocketing towards the end of 2017. It’s currently accessible on a number of other platforms. For example, you can trade futures on the Chicago Mercantile Exchange (CME), the world’s largest derivatives trading platform.  Futures trading is also possible on other cryptocurrency exchanges. Bitcoin futures may be bought or sold on well-known exchanges like Kraken or BitMEX.  Also, through well-known brokerages like eToro and TD Ameritrade.

How To Short Bitcoin – Trading Options 

Futures and options are similar in that they are both derivatives.  This means they are financial products whose value is derived from an underlying asset. Holders of options contracts have the choice but are not obliged to purchase or sell a certain asset at a given price during a specified time period. A “put” is an option contract that wagers on an asset’s price declining. Bitcoin put options might be used to short the cryptocurrency. An investor only needs to risk the premium for buying the option contract at the time of purchase.  This is normally a small sum. Still, options are complicated, and traders who aren’t sure what they’re doing might lose a lot of money.

Other Ways to Short Bitcoins

Prediction Markets

Prediction markets are another approach to shorting Bitcoin. The possibilities with crypto are comparable to those seen in traditional markets. Investors might place a wager based on a stated event.  For example, you may forecast that Bitcoin will drop by a specific amount or percentage.  And if someone takes you up on the bet, you’ll benefit if it happens. However, the other party will benefit if your prediction is wrong.  Augur, Gnosis’ Omen, and Polymarket are three popular crypto prediction markets.

Bitcoin Contracts for Difference (CFDs)

A contract for differences (CFD) is a technique that pays out money for settlement.  The payout depends on price discrepancies between open and closing prices. Bitcoin CFDs, like Bitcoin futures, are simply a wager on the price of the cryptocurrency. When you buy a CFD that predicts the price of Bitcoin will fall it is equivalent to shorting Bitcoin. CFDs have a longer settlement period than Bitcoin futures, which have predefined settlement dates. CFDs also do not necessitate the cryptocurrency’s actual delivery. As a result, you won’t have to pay custody fees. Traders can enter into a contract based on the crypto’s performance, or its performance relative to another cryptocurrency, or against a fiat currency.

Inverse Exchange-Traded Products

Inverse exchange-traded products are wagers that the price of an underlying asset will fall. They are comparable to futures contracts and are used to generate returns in combination with other derivatives. BetaPro Bitcoin Inverse ETF (BITI.TO) and 21Shares Short Bitcoin ETP are two exchange-traded products that you may use to wager on a price decrease for Bitcoin. However, these products are unavailable to citizens of the United States.

Factors to Consider When Shorting Bitcoins

Shorting Bitcoin, like any other cryptocurrency strategy, has a high level of risk. Here are a few factors to think about before shorting Bitcoin:

Bitcoin is volatile

The majority of ways to short Bitcoin rely on derivatives. These derivatives are predicated on Bitcoin pricing.  And, the price changes have a domino effect on investor gains and losses. Bitcoin futures, for example, reflect spot price swings, thus they can’t be used as a hedge against actual Bitcoin investment. Similarly, owing to the underlying cryptocurrency’s price volatility, options trading in Bitcoin can magnify losses.

Bitcoin is risky

When it comes to shorting a cryptocurrency, price is only one of the many hazards you’ll have to consider. Bitcoin is a new asset when compared to other, more established assets. It has been in existence for less than 15 years. As a result, there isn’t enough data or information for investors to make an informed conclusion.  The historical data is thin regarding how it works or if holds its value as an asset. Several concerns relating to Bitcoin splits, for example, remain unsolved. Established platforms are safer to use for derivatives execution.  Emerging platforms can be clumsy and vulnerable to hacking.

Bitcoin regulations are unclear

Bitcoin’s regulatory position across the globe is still unknown.  This is despite its claim regarding universal coverage. Several popular Bitcoin trading sites are not available to American investors. Because there is no regulatory monitoring, exchanges have been able to get away with offers that would not be permitted. Until recently, Binance, for example, provided 125 percent leverage for Bitcoin futures trading. Customers of these exchanges have little legal recourse due to the lack of clarity about their regulatory position.

El Salvador made Bitcoin legal tender on June 9, 2021.1 It is the first country to do so. The cryptocurrency can be used for any transaction where the business can accept it. The U.S. dollar continues to be El Salvador’s primary currency. Will other countries follow suit?

Up Next: What Is Voluntary Life Insurance?

Voluntary Life InsuranceVoluntary life insurance is a type of financial protection that pays a cash benefit to a beneficiary if the insured dies. Employers may provide it as an optional benefit. In exchange for the insurer’s promise of reimbursement upon the insured’s death, the employee pays a monthly premium. Premiums for voluntary life insurance plans are often less expensive due to employer sponsorship than premiums for individual life insurance policies offered in the retail market.

Select employers may provide voluntary life insurance as an optional group life insurance coverage. Company-sponsored voluntary life insurance policies have cheaper rates than individual term insurance policies.  Some may even be paid entirely by the employer. For an additional fee, policyholders may usually raise coverage limits or add coverage for a spouse or kids. Voluntary life insurance, like other types of life insurance, provides a death benefit to the employee’s specified beneficiaries if the employee dies.

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