Despite bitcoin’s meteoric price rise in 2020 and 2021, some investors may be interested in shorting the world’s largest cryptocurrency. Shorting is a way of profiting from an asset’s falling price. Volatile assets like bitcoin can provide ample opportunity for this type of trading.
Short selling is a more advanced trading strategy as it requires exact timing and can involve much more risk than just buying or selling something. Here we’ll cover how to short sell Bitcoin, some places it can be done, and what risks to keep in mind.
Can You Short Bitcoin?
Yes, there are a few different ways that an investor can choose to short Bitcoin. Generally, the idea behind shorting is that you would borrow a certain amount of bitcoins, and sell them at their current price. Then in the future, you’d purchase bitcoins to repay the loan—at which point, ideally, the price would have dropped, so you’d be paying back the loan with bitcoins that were cheaper than the ones you borrowed.
The benefit to shorting Bitcoin is that it allows investors to profit in a down market. The drawback is that shorting involves more risk and is more complex than just buying or selling something.
How to Short Bitcoin: 4 Different Ways
There are four different methods for shorting Bitcoin, including shorting directly on exchanges, using futures, or using options.
Shorting Bitcoin on Exchanges
Perhaps the most straightforward way to short cryptocurrency would be to create an account on an exchange that offers this feature. These exchanges make it easy for users to borrow Bitcoin, sell it short, then buy it back at a lower price. Some exchanges that allow for this include:
If a user’s exchange of choice doesn’t have short selling enabled, they may have to turn to other methods to short Bitcoin.
Does Coinbase Allow Shorting?
Coinbase users asking the question “can you short cryptocurrency” will find that the answer is a definitive no unless they use a different service.
At the time of this writing in April 2021, Coinbase does not provide short selling services. Being more of a beginner-oriented exchange for people who might still be asking the question “what is Bitcoin”, it makes sense that Coinbase wouldn’t have this functionality. Shorting can be considered a strategy better suited to experienced traders.
Recommended: How Do Cryptocurrency Exchanges Work?
Shorting Bitcoin with Futures Contracts
A futures contract is an agreement between two parties to buy or sell something at a certain price on a specific date. Bitcoin futures have existed since 2017 when the CME Group began offering them.
Using futures, a trader can short Bitcoin by buying a contract with a lower Bitcoin price at some point in the future.
Futures are an advanced trading method and come with high risk.
Shorting Bitcoin with Options Contracts
Options are similar to futures in that they are both forms of derivatives—financial instruments that derive their value from an underlying asset.
Options contracts give holders the option but not the obligation to buy or sell an asset at a certain price during a specific period of time. An options contract that bets on an asset falling in price is called a “put.”
Bitcoin put options could be used as a way to short Bitcoin. At the time of purchase, an investor only has to risk the premium for buying the option contract, which is typically a small amount. Still, options are complex and can lead to large losses for traders unsure of what they’re doing.
Shorting Bitcoin with Leveraged Bitcoin Trading
There are some financial intermediaries that offer leveraged trading products like spread betting and contracts for difference (CFDs). These might be the riskiest of all possible ways to short sell Bitcoin because they involve making leveraged bets.
Leverage involves betting with more money than you actually have. This can lead to increased gains for positive-yielding trades, but can also lead to investors losing much more than they risked—and falling into debt when trades don’t go their way.
When engaging in sophisticated trading methods like shorting, having a plan is usually a good idea. Making trades without some kind of strategy or plan is a lot like gambling.
When it comes to short selling, the goal is to be as certain as possible that prices won’t rise in the near-term, since this could lead to substantial losses. Therefore, it’s important to recognize when bullish factors are not present, rather than only looking for bearish factors that are present.
Here is a list to consider when considering to short sell Bitcoin using different shorting strategies.
There are many different ways to use technical analysis (TA) to find shorting opportunities. Some common indicators include:
• Relative Strength Index (RSI): This indicates when an asset might be overbought or oversold. A reading above 80 is thought to indicate overbought conditions, meaning prices could fall soon.
• Bollinger Bands: These indicate when an asset is poised for a big move in one direction or the other. If Bollinger Bands tighten to a narrow range on a chart during a time when other bearish developments are happening, prices could be getting ready to head lower.
• Moving Averages (MAs): When they cross each other in certain ways, they can indicate bearish or bullish sentiment. For example, when the 50-day MA moves above the 200-day MA, this is referred to as a “golden cross,” and is thought to be bullish. Conversely, when the 200-day MA moves below the 50-day MA, this is referred to as a “death cross,” and is thought to be bearish.
This method is less formal. It involves trying to gauge the market’s overall mood.
There are some websites that aggregate the total amount of negative and positive tweets about different cryptocurrencies. While this is not an exact science by any means, it’s thought that coins tend to rise in price when there’s more positive social media chatter about them.
This can sometimes be misleading though, since the majority can often be wrong.
Using fundamental analysis for Bitcoin looks a little different than using fundamental analysis for stocks and other assets. Here are a few key metrics to keep in mind when it comes to Bitcoin.
• How’s the network activity? Are there a lot of new users coming online, creating wallets and buying coins? If so, this could be bullish.
• What are miners doing? Are they holding coins or selling them right away? When miners hold coins, it means they think prices are going to rise, indicating bullish sentiment. It could be helpful to understand how bitcoin mining works in this regard.
• Are coins moving toward or away from exchanges? Many crypto news outlets often report on the volume of coins leaving or entering exchanges. When people move large amounts of crypto off exchanges, it means they plan on holding for the long-term, which could be bullish.
If one or more of these bullish factors are present, it might not be the best time to try to short Bitcoin.
Is Shorting Bitcoin Risky?
Shorting anything involves substantial risk. The main thing investors might want to understand is that shorting can result in unlimited losses.
This can occur because there’s no upward limit on the price of Bitcoin. After having entered a short position, traders take a loss if the underlying asset goes up. The more the price rises, the more losses pile up. In this way, an investor who is short Bitcoin can go bankrupt quickly if the price doesn’t retreat. This risk can be hedged using a stop-loss, which will automatically close out a trade at a specific price level.
After learning how Bitcoin can be shorted, the concept might scare some potential investors away. The risk of shorting anything is high, and timing the exact point at which markets become overbought can be difficult for even the most experienced traders. There are many stories of people losing money when investing in Bitcoin because they either used too much leverage or tried to short at the wrong time.
SoFi Invest makes it easy to buy and trade cryptocurrencies like Bitcoin and other popular crypto—without having to worry about short selling, fundamental analysis, or any other complicated investing techniques. Plus, you can manage your account from the convenient mobile app.
Photo credit: iStock/MUUSU
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