You might be wrong if you think that you can only make money in crypto when the market goes up. This means you are unaware of the concept of shorting. Shorting allows you to make money when the market goes down.
So if you believe that Bitcoin or any other crypto will crash in the coming days, taking a shorting position might be a great idea.
But is it that simple? Well, before you place your first shorting trade in the crypto market, let’s know how it works and the math behind it.
So here we go:
What does shorting Bitcoin or Crypto mean?
The concept behind shorting is to buy Bitcoin or any other crypto at a high price and then buy it back at a lower price.
Usually, most traders prefer buying crypto at a lower price and selling it at a higher price. But when it comes to short, you just need to do the opposite.
To get into a short position, you will need to borrow cryptocurrencies and sell them on an exchange at the current price. Then you will need to buy the cryptocurrency at a later date and repay the capital you have borrowed.
If the price drops when it’s time to repay your capital, you profit from the difference between selling and buying price.
However, to help you understand better, here is an example:
For this example, we are going to short 10 Bitcoins. The current market price of each Bitcoin is $60,000 leading to a total of $6,00,000.
To execute this trade, we will have to borrow 10 Bitcoins from our broker at the current market price.
Now the market moves as we have expected, and the price of a single Bitcoin falls to $50,000, leading to a total of $5,000,000.
So we buy at this market price and return the funds to our broker.
Now let’s do the math, Previous Market price ($6,00,000) – Current market price ($5,00,000) = Profit ($1,00,000). This is what you are going to book as a profit.
In short, shorting means doing the opposite of going long. The shorting concept really comes in handy when you expect a currency’s value to drop. On the other hand, you should go long when you know the market price will go up.
But you should know that shorting comes with risks. So if the market doesn’t move as expected, you may have to buy a currency at a higher price to pay back your broker.
How to Short Bitcoin?
Now there are different ways of shorting Bitcoin or different types of short trading concepts. Some of the known ones are the following:
Margin trading is said to be the easiest option. Many crypto exchanges support margin trading like Binance Futures, FTX and Phemex. In this trading type, you are borrowing crypto from a broker in order to execute a trade.
Also, you should know that margin involves borrowing or leveraging money. This means it cannot only increase your profits but lead you to greater loss.
Usually, the broker offers you a certain percentage of the money you can borrow from the exchange and use it for your trading. Also, after a given number of days, you will need to return the money you have borrowed and settle down the transaction.
Like any other asset, Bitcoin, too, has a future market. In a futures trade, you are buying security with a contract. The contract specifies when and at what price the security will be sold. If you buy a futures contract, you are betting that the price of the security will go up. So you can get a good ROI.
On the other hand, if you believe that Bitcoin’s value will drop in the coming future. Thereafter, you must purchase contracts that bet on a lower cryptocurrency price.
In short, when you are shorting futures, you agree to sell a contract at a lower price. Plus, the good part about it is that new traders can get into it with modest investment.
CFD stands for contract for differences. It is a financial strategy that pays out money based on the price difference between open and closing prices for settlement.
It is a similar concept to Bitcoin futures. As they are betting on the cryptocurrencies price. So when you purchase a CFD, you are betting that the price of Bitcoin will fall. Hence, you are shorting Bitcoin.
For instance, if Bitcoin is trading at $60,000, you short sell it and later close your position when the price reaches $55,000. So you made a profit of $5000.
Plus, the good part of CFDs is that they have a flexible settlement tenure, unlike the Bitcoin futures.
There are also binary options for shorting Bitcoin. The call and put options are a well-known concept where you have to execute a put order using an escrow or other services. Your goal is to sell the currency at today’s price, even if the market price drops later on.
There are many offshore exchanges that offer you binary options. But it involves high cost and risk.
But the main advantage is that you can limit your losses by not choosing to sell your put options. So you are only taking a loss of the money you spent on creating a put order.
Overall, it is a short-term and limited-risk contract trading type. It has two possible outcomes. The first outcome, you make a profit which you have predefined. Or you lose the money you paid to open the trade.
There is also the prediction market. This is pretty similar to the mainstream markets. As a trader, you can create an event to make a wager based on the outcome. You will have to predict that the Bitcoin price will drop by a certain margin or percentage. In case if anyone takes up on the bed, you will get profit if your prediction comes true.
Or you can say that when you are opening a prediction market shorting trade, you are betting that the value of the crypto will go down. There is no need to lend funds from anyone. If your bet hits the bullseye, you take your profit home.
Risk and Rewards of Shorting Crypto
Short selling may seem like an easy deal. But you should know that it involves high risk if the market doesn’t go as per your expectations. But if it does, it can bring you handsome profits. However, to help you understand better, here are some risks and rewards in the crypto market:
Without proper market study, you can face infinite losses.
You will need to have a margin account to start selling short.
Margin interest incurs with short selling.
Shorting brings you a great opportunity to earn high profits.
It requires minimal initiation capital to start.
With shorting, you can possibly leverage investments.
So that was all about how to short Bitcoin or any other cryptocurrencies. The only thing I would say is you should only go short when you know the market is going to crash. So do wait for proper signals. Also, initially make sure to trade with a small margin only to avoid huge losses.