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How to Short Bitcoin in 2023

By Brian Nibley · December 16, 2022 · 8 minute read

We’re here to help! First and foremost, SoFi Learn strives to be a beneficial resource to you as you navigate your financial journey. Read more We develop content that covers a variety of financial topics. Sometimes, that content may include information about products, features, or services that SoFi does not provide. We aim to break down complicated concepts, loop you in on the latest trends, and keep you up-to-date on the stuff you can use to help get your money right. Read less

How to Short Bitcoin in 2023

It’s possible to short Bitcoin using a handful of different strategies. And as the crypto markets remain tumultuous, knowing how to short Bitcoin and other cryptocurrencies can be useful to investors.

Shorting is a way of profiting from an asset’s falling price. Volatile assets like Bitcoin can provide an opportunity for this type of trading. But be warned: 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, it is possible to short Bitcoin. Shorting Bitcoin is effectively the same as shorting a stock, as an investor is making a bet that the asset will lose value.

There are a handful of 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, theoretically, the price would have dropped. So, you’d be paying back the loan with Bitcoins that were cheaper than the ones you borrowed.

You would then profit off of the difference between the two prices when the Bitcoins were sold and repurchased. It’s similar, in some ways, to cryptocurrency arbitrage.

The benefit to shorting Bitcoin is that it allows investors to generate a profit in a down market. The drawback is that shorting involves more risk and is more complex than just buying or selling something.

💡 Take a step back: Learn more about Bitcoin, its origins, and how it works.

Example of Shorting Bitcoin

Here’s how shorting Bitcoin may look in a practical sense:

You anticipate that the price of Bitcoin will fall in the coming days or weeks. So, you plan to short sell five Bitcoins. You borrow those Bitcoins, and sell them for, say, a total of $100,000 ($20,000 each). Two weeks later, the value of Bitcoin has fallen 20%, and BTC is now trading at $16,000.

You would then repurchase the five Bitcoins you sold, spending a total of $80,000 ($16,000 each). You repay the lender the five Bitcoins, and pocket the difference. Effectively, by shorting, you’ve netted $20,000.

How to Short Bitcoin: 5 Different Ways

There are several different methods for shorting Bitcoin. Here are some of the most popular among crypto investors.

Shorting Bitcoin on Exchanges

Perhaps the most straightforward way to short Bitcoin would be to create an account on a crypto 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 Kraken, Bitmex, Bitfinex, eToro, and Binance.

But note that not all exchanges allow users to short crypto. In that case, 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 no.

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. These can be used to trade Bitcoin, and Bitcoin futures contracts have been around for several years now. Using futures, a trader can short Bitcoin by buying a contract with a lower Bitcoin price at some point in the future.

Again, this would help an investor profit if they were anticipating a fall in Bitcoin’s price. They could then exercise the contract and purchase Bitcoin at a lower price than market value. It’s important to keep in mind, though, that 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.

There are several different options trading strategies out there, too.

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 (essentially, a purchasing fee) 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.

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Short-Selling Strategies for Crypto

When engaging in sophisticated trading methods like shorting, it’s a good idea to have a plan going in. Making trades without some kind of strategy or plan is more akin to gambling than serious investing.

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 in the market, 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.

Technical Analysis

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 occurring, prices could be getting ready to head lower.

•   Moving Averages (MAs): When they cross each other in certain ways, moving averages 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.

Sentiment Analysis

This method is less formal. It involves trying to gauge the market’s overall mood, or market sentiment. For instance, 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 the values of assets tend to rise in price when there’s more positive social media chatter about them.

Again, this isn’t an exact science, and market sentiment can often be wrong. With that in mind, tread carefully when trying to read the minds or moods of the market.

Fundamental Analysis

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 into the market, creating wallets and buying coins? If so, this could be a bullish signal.

•   What are miners doing? Are miners 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, too.

•   Are coins moving toward or away from exchanges? Many crypto-oriented media 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.

When Should You Consider Shorting Bitcoin?

In the simplest terms, investors who are willing to assume the risks associated with short-selling should do so when they think that an asset’s value will fall. It may be helpful to think of shorting as “making a bet against,” and as such, if you were under the impression that Bitcoin’s value was going to decline in the days, weeks, or months ahead — after doing lots of research, of course — that might be the time to short it, if it aligns with your investment objectives and risk tolerance.

Conversely, if you were anticipating Bitcoin’s value rising in the future, perhaps because it is currently undervalued by the market, you would not short it. Instead, that may be the time to engage a buy-and-hold investing strategy in an effort to earn a return.

Is Shorting Bitcoin Risky?

Shorting anything involves substantial risk. Perhaps the most important thing that investors should understand about shorting is that it 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 lose all of their investment 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.

The Takeaway

Investors can short Bitcoin, but it’s often an involved and complicated process. Not to mention risky — short-selling any asset is generally riskier than other investing activity, and it can be difficult to turn a profit even for experienced traders. But by shorting on exchanges through margin, or using futures and options contracts, intrepid crypto investors can short Bitcoin.

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Photo credit: iStock/MUUSU

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