How to Short Bitcoin in 2024 – Top 5 Strategies

Shorting Bitcoin (BTC), or short selling Bitcoin, is a trading strategy that exploits declines in the price of the cryptocurrency for profit. The way it works is that a trader borrows Bitcoin from a broker, or crypto trading platform, at the current market price and sells it in the open market with the aim to buy it at a lower price in the future. The objective is to pocket the price difference.

Shorting Bitcoin is a good option if the trader expects Bitcoin’s price to drop in the near future. Such a strategy could provide traders with considerable profit in a short space of time. Also, shorting crypto could prove an effective strategy to hedge against losses in other trading positions. Therefore, it’s useful for traders or potential traders to know how to short a cryptocurrency.

Strategies for shorting Bitcoin – A quick look

There are several strategies for shorting Bitcoin or other cryptocurrencies. Read a brief description of the top 5 below:

1. Margin trading – This strategy allows traders to borrow money from a broker or exchange to short sell Bitcoin.   

2. Futures –These contracts involve an agreement between a buyer and seller to buy or sell an agreed number of BTC at a set future date for a set price.

3. Inverse ETFs – Inverse ETFs allow traders to bet that an underlying asset’s price, in this case Bitcoin’s price, will drop.

4. Options – This financial product gives traders the right to either buy or sell Bitcoin at a specified price (exercise price) before a specified date, but the holder of the options contract is not obligated to do so.

5. CFDs – Contracts for difference are derivative instruments that allow a trader to bet on Bitcoin’s price movement without owning it.

Strategies for shorting Bitcoin – A closer look

Margin trading

Trading on margin is the most popular and easiest way to short sell Bitcoin. This strategy allows traders to use leverage, i.e.: borrow more money from a broker or exchange than deposited to execute the strategy. Since this strategy involves the use of leverage, it may magnify profits as well as losses. Therefore, it’s a high-risk strategy that’s bet to left for experienced traders.

To short Bitcoin, you will first need to open a margin trading account with an exchange or brokerage and place a short sell order for Bitcoin. You can set stop-loss and take-profit levels to minimize your risk. Also, it’s recommended that you monitor your trade regularly to manage the risk.

Borrowing money for margin trading is similar to borrowing money from a bank as you will have to pay back the money with interest. Also, you get a fixed number of days to return the money.

Negative balance protection that many regulated brokers offer is another safeguard that ensures traders cannot lose more money than they have deposited in their accounts, preventing racking up debt to the broker. The trader’s losses will be limited to the initial capital, and the account will be reset to zero. You can lose more money than you wager on a single position, but you can’t lose more money than you have in your trading account.

Futures

Similarly to several other assets, such as commodities, Bitcoin has a futures market. Futures contracts allow traders to buy Bitcoin on the condition that it will be sold at a future date at a predetermined price. You can even sell futures contracts, which means you will benefit from the drop in Bitcoin price.

A Bitcoin futures contract is an obligation for both the buyer and the seller. When you buy a futures contract, it means you are betting that Bitcoin’s price will rise. If you are selling a futures contract, it implies you are expecting the Bitcoin price to decline.  So, you can short sell Bitcoin by purchasing a futures contract that bets on a lower price.

Bitcoin futures trading gained momentum at the end of 2017. Many platforms now allow traders to short Bitcoin, including the Chicago Mercantile Exchange (CME), the world’s biggest derivatives trading platform.

Inverse ETFs

Inverse ETFs are similar to futures contracts, and traders need to use it with other derivatives to generate a return. Such a strategy allows traders to bet on the fall in an underlying asset’s price.

In simple words, an inverse Bitcoin ETF provides investors with an inverse or opposite return of the underlying assets. It means, if the Bitcoin price drops, the ETF value will climb, and vice versa.

Inverse Bitcoin ETFs are usually for short-term trading. They may not accurately track the performance of BTC over longer periods due to factors like tracking errors and fees.

Bitcoin traders can also use a short spot Bitcoin ETF to benefit from a drop in Bitcoin’s price without having to open a short Bitcoin position yourself. Such an ETF profits from a drop in the BTC price by directly selling BTC or a derivative contract, and you profit via owning a share in the ETF.

Options

With options trading you are simply betting on a ‘yes’ or a ‘no’ scenario, i.e.: whether Bitcoin’s price will go up or down. Options are similar to futures, but they provide investors with the option but not the obligation to complete their trade.

In options, if you wish to short an asset, you need to execute a ‘put’ order. Thus, to short sell Bitcoin using options you will have to purchase put options. On the other hand, if you expect the Bitcoin price to go up, you need to execute a ‘call’ order. It gives you an option to buy BTC later but at the current price.

Suppose, you buy a put option expecting the price to drop later, but the Bitcoin prices go up. In this case, you won’t have to buy the BTC at a higher price. Remember options trading gives you an option but is not an obligation. So, if prices don’t go as expected, you will only lose the amount paid (premium) for the put order.

CFDs

Contracts for difference offer another way of short selling cryptos without owning them. A CFD is similar to Bitcoin futures as it allows you to bet on Bitcoin’s price. However, unlike futures that have predetermined settlement dates, CFDs have more flexible settlement tenure.

To short sell Bitcoin you will have to order a CFD predicting that prices will decline. To use a CFD, you will have to deposit some funds into your trading account which will work as a guarantee. This amount will be held as collateral by the exchange or the broker.

CFDs work like futures but have a longer settlement period and there is no obligation for a physical delivery of the underlying asset. This helps investors avoid custody fees. Also, CFDs don’t require investors to establish, maintain, and encrypt a Bitcoin wallet as investors are merely trading on the price movement.

Shorting Bitcoin – Quick steps

Here’s a quick guide to the steps you need to take to short Bitcoin:

• You need to get a good understanding of the crypto market and an in-depth knowledge of trading strategies.
• Next, it’s very important that you select a reputable exchange to short sell Bitcoin, such as Binance. This will ensure accurate prices, liquidity and standard terms.
• After selecting a reputable exchange, you will have to enable a margin account.
• Once your margin account is activated, you will have to transfer funds to your margin wallet.
• For short positions, you need to provide collateral, which serves as a guarantee that you will cover the losses if the Bitcoin price increases.
• Once the platform confirms the guarantee you can borrow money and start trading.
• You then have to select the trading pair, set the target and amount for a margin sell order. The trade will automatically execute once the price hits the target.
• Lastly, you need to close your position by repurchasing BTC at a lower price to repay the borrowed amount. For this, you need to place a buy order.

Pros and cons of shorting Bitcoin

Pros

Profit in any market condition – Investors with only a long position may fail to make profits when the market is down. On the other hand, investors with both short and long positions get the opportunity to make a profit during recessions or stock market crashes as well.

Act as an insurance – Investors or traders can use short selling to hedge their long positions. In a way, short selling allows traders to invest more aggressively on the long side as they know that short positions will work as insurance against downturns in long positions.

Profit with a small investment – Bitcoin, with a value of more than $60,000, is out of reach for many investors. This is where short selling can help. It allows traders or investors to benefit from Bitcoin’s price without owning it.

Cons

Unlimited downside – Unlike a usual stock market trade, the dynamic is reversed for short sellers. A short seller will make a 100% return if the price of the asset goes to zero. However, the potential losses of a short seller are theoretically unlimited as the asset’s price could triple or quadruple.

Short selling fees may erode gains – This drawback is more relevant for margin trading where a trader borrows money from the exchange. The broker or exchange fees on the borrowed amount may reduce or completely wipe out the profit earned by shorting Bitcoin.

Regulatory changes – Cryptocurrencies are still a relatively new market. Every now and then we hear about some new regulations regarding crypto trading, and this increases the risk and volatility. Regulatory uncertainty makes it harder for traders or investors to fool-proof their trading or investing strategy.

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