Short Selling Bitcoin - a Step by Step Beginners Guide
While many cryptocurrencies are available on the market, Bitcoin has remained one of the most popular and profitable investments since the cryptocurrency's inception in 2009. However, that doesn't mean it won't have wild fluctuations, as crypto is considered highly volatile.
Thankfully, due to these fluctuations, the increase in volatility means that those who are willing to short sell Bitcoin can profit when it both drops and gains in value. If you're interested in short-selling Bitcoin, we'll provide everything you need to know in this step-by-step beginners guide.
What is BTC Shorts?
For those of you who are new to the crypto world, short selling is simply when an investor makes a bet that the value of an asset will decrease or increase in value. To do this, an investor must understand the market and have solid reasoning behind their bet.
Short selling offers an opportunity for investors to make significant returns on their money if they guess correctly. It also allows traders to "dip in and out" as some investments can be more profitable than others or alternatively allow those who think there's too much hype surrounding certain currencies to take advantage of any future falls.
While shorting Bitcoin might sound like some kind of voodoo magic – unlikely to yield any returns and fraught with risk – there's actually a large number of people who make a living from it. That's why it's essential to understand the basics of shorting crypto and how it works to help you get started on your next investment.
Longs vs. Shorts - The Key Differences
Before we take a look at how you go about shorting Bitcoin, it's essential to understand the differences between "shorts" and "longs." The two concepts are two different ways to go about making a profit on Bitcoin. Below are examples of shorting and longing BTC.
Shorting BTC Example
Let's say Bitcoin is around $5,000 for 1 BTC. However, you're anticipating that there will be bad news surrounding cryptocurrency and its volatility, which will negatively impact the price of BTC. With this in mind, you might sell five bitcoins for $5,000 for a total of $25,000. Now, you'll deposit the margin collateral (1:100 leverage) and deposit $50.
As predicted, bad news did impact the crypto market, and now the price of Bitcoin has dropped to $4,500. You'll then buy back your 5 Bitcoin at $4,500 for a total of $22,500. From this move, you made a total profit of $2,450.
Longing BTC Example
Taking the same example, let's say that Bitcoin is currently pricing for $5,000, but you believe that it will go up in price. You purchase five bitcoins for a total of $25,000. Again, in order to do leveraged trading, you'll need to put down 1% or $50. If you were correct, and Bitcoin does increase to a price of $5,100, you can then choose to sell out and make a profit because your prediction was accurate.
In this scenario, you would make $450 in profit because of your long position.
Is it Profitable to Bet Against Bitcoin?
The answer is both: yes and no. While short selling can be highly profitable, it is also extremely risky and should not be attempted by beginners; especially when dealing with such an unstable currency. Just like regular investments, there are both strong and weak currencies. So when you're starting to short sell any asset, it's essential to understand the market and know that you're putting your money at risk for potential losses.
Pros of Shorting
- Ability to make a ton of profit in a short amount of time
- One of the only ways to make money if the market is bearish
- A great way for knowledgeable traders to apply their knowledge
Cons of Shorting
- One misinformed decision can lead to loss of your investment
- Can cause the crypto dip into a crash if many other investors have the same idea
- A huge risk for little reward - not recommended for beginners or investors without knowledge of the crypto world. While it can be highly profitable if done correctly, it can be potentially devastating if you're wrong. Keep in mind, this is not trading. Instead, it's making an educated guess on what you think the market is going to do.
How to Short Bitcoin in the Most Effective Way?
Shorting Bitcoin is a powerful investment tool that only experienced traders should attempt. To begin shorting, here are a few steps you need to take.
1. Choose Your Crypto
The first thing you'll need to do is choose the crypto you want to trade. Since there are so many to choose from, it's essential to do your research and understand the market before you start trading. While you can choose Bitcoin, there might be other viable options on the market like Ethereum, Lithium, Litecoin.
2. Understand The Market
Once you've found the crypto you want to short sell, it's essential to understand what makes up the market. There are many factors that can influence crypto's price, such as status, the economy, current events, and public opinion. You'll need to make sure that your prediction is strong enough to withstand these factors before you start shorting any cryptocurrency.
3. Open Margin Trading Account
Next, you'll need to open an account with a crypto exchange that offers margin trading. With this feature, you can leverage your money and choose to borrow additional funds to increase your investments' size. This is something that many traders use when they want to make huge profits or protect themselves from potential losses.
4. Limit Your Exposure
The final step you'll need to take is to ensure you're trying to minimize your risk. Use tools that can help limit your exposure, such as stop losses or crypto shorting calculators.
5. Go Short
Finally, you can now go short Bitcoin. Remember, this is a powerful tool that only experienced traders should attempt because the risk/reward ratio is not in your favor if you're wrong. The goal here is to make educated guesses about where the market will be heading so that when your prediction comes true, you'll have potential profits waiting for you.
Top 3 Strategies to Short Bitcoin
While there are many ways to short Bitcoin, here are the top 3 strategies to quickly get started.
1. Margin trading
This is the most popular way to short Bitcoin because it's effective and available on many platforms. In order to start margin trading, you'll need to open an account with an exchange that offers this feature. The idea behind this type of trading is to borrow money from a broker platform and hope that your bet pays off after you've created your trade.
2. Futures trading
Another way to short Bitcoin is through the use of futures trading. This type of trading allows you to take a short position by signing a contract that allows you to buy Bitcoin at a future date at a specific price. The idea is that you're hoping the price of Bitcoin goes in your favor so that you can buy Bitcoin below the market price.
Last but not least, you can short Bitcoin with CFDs. This stands for contract-for-difference and works when you create an agreement where you can sell your crypto in exchange for utilizing someone else's capital. The idea behind this is that the trader will make a profit if your prediction doesn't pan out.
Essentially, you're borrowing money from a platform, selling your crypto at a lower price, and then repurchasing it once the market has turned to make up a profit, or buying at a low price and selling high.
When to Short Bitcoin
Knowing when to short Bitcoin can be a difficult task for most traders. While the price is never set, there are certain factors you'll need to look at which may influence when it's a good time to begin shorting Bitcoin.
Research Common Market Trends
First, you can look at the overall market trends to understand how Bitcoin likes to move. For example, it's common for the market to take a downturn after the holidays, but it could quickly go back up before January begins. These markets tend to fluctuate like this because people are buying during the holiday season and selling right after. Understanding what influences the market can help you make a better decision of when to invest.
Cryptocurrency can also be affected by changes in the Fiat system. For example, when a country decides to make a significant change to its economy by removing certain banknotes from circulation, you'll often see Bitcoin increase in value because it's seen as a way to move money around without banks.
Updates To The Coin
One of the most significant ways you can influence when to invest in Bitcoin is by looking at its updates. If there's an updated version of the coin, or they're improving the code, it's often seen as an excellent opportunity to get involved because it shows the coin's stability.
Lastly, you should look at the political environment surrounding Bitcoin. For example, if there's a change in government or politics that could have an impact on how you move money around, this can often influence the price of Bitcoin.
Another way you can gain an inside view on whether to invest in Bitcoin is by keeping up with world events. For example, if there's a new war, or people are fighting for their rights, it's often seen as a good time to keep your money safe and invest in Bitcoin so it can't be quickly taken from you.
Lastly, you should pay attention to new regulations that could impact the price of Bitcoin. For example, when China created a ban on ICO's and stopped local exchanges from allowing people to buy crypto with their Yuan, you saw the price of Bitcoin take a significant hit. However, it quickly recovered and went back up because other governments made similar laws or regulations beneficial for cryptocurrencies like this one.
The Risks Of Shorting Selling Bitcoin
The risks of investing in Bitcoin can often outweigh the benefits, especially if you're short-selling Bitcoin. While many different scenarios could play out when making this type of trade, not every market will work in your favor. Unfortunately, this means you'll have to put in a lot of effort and time to make sure you see any profit in the end.
Perhaps the most significant risk when it comes to shorting Bitcoin is the fact that nobody really knows what will happen in the future. While you'll be able to create an educated prediction, things are constantly changing, and you might not see any returns for a long time, if at all. With that being said, you should always create a plan and stick to it instead of taking unnecessary risks.
Another risk of shorting Bitcoin is the taxes you may have to pay when selling it for a profit. This is because, depending on the country you live in and the amount of money you make from a trade, you may have to pay a substantial tax on your gains. Again, the best way to know if you owe any taxes is to check your government regulations surrounding cryptocurrency or consult a tax expert.
Which Exchange to Choose?
Lastly, you'll have to choose where you want to short sell Bitcoin. While many different types of exchanges allow you to do this, not all will be beneficial for your needs. You should always research the pros and cons of each before making a final decision on which one to use.
Binance Short Selling Bitcoin
One of the best places to short sell Bitcoin is Binance. This exchange allows you to make a trade within minutes, and they offer a large variety of coins that can be used as collateral for your trades.
The most significant benefit of using Binance is that you have access to their platform from anywhere in the world with an internet connection. This means you can make trades wherever you are and whenever convenient for you.
Binance also has low fees, which makes this process more affordable than other exchanges to fit into any budget or investment strategy easily. To get started with Binance, you'll need to create an account through their website.
Bittrex Shorts Bitcoin
Another reputable exchange that allows you to short sell Bitcoin is Bittrex. This cryptocurrency marketplace was created in 2014 and has a large following of traders from all over the globe.
One of the biggest benefits of using Bittrex is its security features, making it a safe place for crypto transactions and exchanges. You'll also have access to their customer support team, who can assist you if you need it.
Another great thing about Bittrex is the fact that they charge very low fees for using their platform to make Bitcoin trades. However, there's one drawback in this exchange - they tend to have a high minimum deposit compared to other exchanges, so your initial investment may be higher than you expected.
Shorting Bitcoin on GDAX / Coinbase Pro
One of the most popular choices when it comes to choosing an exchange that allows you to short Bitcoin is Coinbase Pro. This platform was created by the same company behind Global Digital Asset Exchange (GDAX).
As one of the largest exchanges in North America, many people use this platform, and they offer low fees, so every trade has a chance to make money. Coinbase Pro has a variety of coins available to trade, but you can't use all of them for shorting purposes.
Where to Buy Cryptocurrency to Start Shorting Bitcoin
Now that you've chosen the ideal exchange for shorting Bitcoin, it's time to purchase some cryptocurrency. But, of course, just like when you're trading any other currency or stock on an exchange, you'll have to spend some money first before placing a trade on the market.
One of the easiest ways to purchase Bitcoin is through PayDepot's ATMs, which are found in many cities across North America. In addition, you can use cash to get Bitcoins and start trading once they enter your account!
PayDepot has low fees, making it an affordable way to purchase Bitcoin for short selling purposes. You can also choose from a variety of cryptocurrencies, and they'll always be adding more in the near future as well.
Can Bitcoin be shorted?
Yes, you can short Bitcoin on exchanges like Binance and Bittrex, which allow you to make trades using cryptocurrencies. You'll need to purchase some before placing your first trade. However, this is a process that takes only minutes.
Is short selling more profitable?
It's possible to make a profit with both long and short selling Bitcoin. However, in most cases, you'll want to study the market as well as the possibility of volatility before deciding on how to trade.
Is short selling ethical
There are pros and cons when it comes to short-selling Bitcoin. On the one hand, you can make money without owning or trading cryptocurrency, so this process is more affordable than other trading strategies.
On the other hand, some critics find this trading style unethical because they claim that it's damaging to the whole industry since it could lead to other people losing money.
Is Leverage Trading Regulated?
Leveraged trading is regulated in most countries and has strict rules that traders must follow. Nevertheless, it can be a useful strategy if you're careful and know how to work with the leveraged system without putting too much at risk and losing money.
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