The basic idea behind shorting Bitcoin or any other traded asset is simple. This is why short positions are extremely common in the cryptocurrency market. This strategy allows traders to speculate on declining price values. Bitcoin (BTC) is the most commonly shorted cryptocurrency. Shorting is an investment technique in which the investor tries to profit from a decrease in the price of an asset. Let’s explore more about Bitcoin shorting.
What is Bitcoin shorting?
In essence, if a trader thinks that the price of an asset will fall in the future, he borrows the asset from a brokerage firm and sells it at its current price. He then takes a short position by buying back after the price drops. Thus, the price difference results in a profit for the trader. With this market speculation, investors make profits as the prices of assets fall. As such, it is common in most cryptocurrencies, especially Bitcoin.
What are the best short position methods?
So what is the best way to open a short position? Investors to open a Bitcoin short position; It can use spot margin trading, options trading, and futures derivatives trading. These are just a few of the popular ways that traders position themselves to profit from the falling BTC price. As Kriptokoin.com, we have compiled how to use these methods in detail below.
Shorting with Bitcoin futures
The futures market allows parties to enter into settlement contracts in which both parties will buy or sell the asset at a fixed time and price. Therefore, it is the best course of action for a trader looking to short Bitcoin. In this method, they consent to take the sell side of the futures contract and sell BTC to the buyer at a certain price. Then, if they think that the BTC price will drop below the predetermined level, they buy the asset on the market at the swap date and time and sell it at a higher price.
Opening a short position with options trading
Options allow settlement on a predetermined price within a certain time frame. These are basically contractual agreements between the parties to a transaction. Depending on their investment tactics, investors have two options to choose from.
The right to buy Bitcoin at the strike price is normally provided through call options that increase in value when the BTC price rises. These options are used when the market is bullish. However, put options give the holder the opportunity to sell BTC at the strike price ideally lower than the current price. The value of this contract increases as the BTC price drops.
Spot margin trading
A growing number of Bitcoin trading platforms now provide spot margin trading as a service. It requires buying and selling digital assets while taking advantage of the fast deal offered by these brokers. This is why a trader, after shorting BTC using margin trading, usually borrows and sells assets from their brokers.
Then, when the expected value of the assets drops, it buys them back. Thus, they make a profit by keeping the difference between the buying and selling prices of borrowed cryptocurrencies. In fact, the simplest way to short BTC is margin trading. Compared to other techniques, it represents the simplest method of short positioning.
Where is Bitcoin shorting done?
There are countless ways to short Bitcoin, each with their own level of complexity, risk, and reward. All methods that allow you to do this fall under the derivatives trading category, with the exception of shorting through a traditional swap. A favorite way to short Bitcoin is an exchange that allows it. Many exchanges allow Bitcoin to be shorted, including FTX, Binance, Kucoin, and Kraken. It also provides Deribit Options Trading contracts.
Why do investors short BTC?
By shorting BTC, an investor profits off the falling Bitcoin price. Markets don’t always move forward. Usually, the asset benefits as it rises and then falls. Investors are more interested in short positions when prices fall or a bear market occurs. Because in this way, they earn income from falling prices. Also, people who use this method often do not believe that Blockchain and BTC will do well in the future. Therefore, they aim to make short-term profits and do not hold their assets for the long-term.
How to short BTC with and without leverage?
All crypto exchanges and most FX exchanges globally allow shorting. Leverage is not always necessary, although it is almost always a possibility. So what does leverageless short mean? This means you sell Bitcoin at the spot price, watch the drop in value, and then buy it back. It is possible to open a short position without leverage on any exchange that offers Bitcoin spot trading such as Bitstamp, Kraken, Binance.
How to short Bitcoin with an ETF?
In June 2022, the ProShares Short Bitcoin ETF (BITI) was introduced. This makes it the last approved fund on this list. The only ETF currently allowed by the SEC to trade the exact opposite of Bitcoin’s daily performance is BITI. The ProShares Short BTC ETF trades futures contracts on the CME, similar to BITO. However, as BITI is a short BTC ETF, it allows for short bets. As part of its hedging strategy, BITI allows investors to profit from the falling price of the cryptocurrency.
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