Cryptocurrency investments have brought fortunes to those who were able to take the right action at the right time. But in the world of crypto, taking the right action at the right time is more complicated than it may seem because of its rapidly changing climate. 

Bitcoin trading offers many advanced trading options alongside spot trading. For example, many well-known Bitcoin exchanges offer short selling features through the derivatives market. Plus, there are markets outside exchange platforms where you can bet against Bitcoin’s price. 

After reading this article, you will have more in-depth knowledge of your shorting options when it comes to cryptocurrencies.

Gold bitcoin icon served on white plate beside fork and knife on white surface

What Is Short Selling?

Short selling is basically betting on the price fall of any asset in different financial markets. Even though the strategy originated in the stock market, the cryptocurrency market adopted it later on to provide a better investment environment to its trades.

Shorting cryptocurrencies is a good idea if you believe their price is likely to crash at some point, as it allows you to profit from a downturned market. Since the cryptocurrency market is subject to high volatility, derivatives trading is an essential part of the game. You can short sell Bitcoin (BTC) or any other cryptocurrency in an exchange that supports it, such as Binance, Kraken, or Bitfinex, or head to a brokerage.

There are several ways you can short sell crypto since the cryptocurrency market has become a very advanced investment environment. Some are straightforward, and some are more advanced, requiring you to take precautions against the high risk they involve. 

Additionally, all shorting strategies have their advantages and disadvantages. For example, diversifying your investment portfolio is good in terms of reducing risk because you have more options, so if you take a short position, you can even profit from a downturned market. Plus, you can employ leverage by short-selling, so you may expect a higher potential return than spot market trading. However, derivative trading is also riskier than the regular spot market. If the market takes an unexpected turn, you may have to invest more to cover your position or else you’ll lose it all.

If all of this sounds like a lot, don’t worry because, in this article, we’ll go over all the ways you can short Bitcoin step by step, explaining the pros and cons of all of them so that you can find the best trading strategy that suits your needs.

How to Short Sell Bitcoin

Margin Trading

Margin trading allows you to trade borrowed digital assets, making it one of the easiest ways to short Bitcoin. Nowadays, many exchange platforms allow margin trading. The lender is generally the exchange platform itself, but there are also margin pools that incentivise investors to lend. The logic behind trading borrowed funds is as follows: if you think that Bitcoin’s price in terms of USD will crash soon, you borrow BTC and sell it for its current price. If your prediction is correct and the market value BTC crashes, you will restore your borrowed BTC for a lower price.

The best part of margin trading is that you can trade in bigger volumes than what your purchasing power allows because you trade borrowed funds with it. However, the risk of margin trading is that the market might move in the opposite direction of your anticipation, leaving you under an obligation to pay more than you initially invested to cover your margin.

Borrowing assets also comes with an interest rate, just like borrowing loans from a bank.

Futures Market

Most cryptocurrency trading platforms today also offer futures trading. Simply put, a future is a contract that says you’ve agreed to buy an asset on a certain date in the future for a predetermined price. Buying a futures contract puts you in a long position, meaning you make a profit if the price of your contract increases.

To short sell Bitcoin in the futures market, you need to sell a Bitcoin futures contract. In other words, when you are shorting on the futures market, you agree to sell a contract at a lower price in the future. You need to deposit an initial margin or collateral to enter the futures market.

If your maintenance margin limit is hit, your position gets liquidated. This is called forced liquidation. When you are using a leveraged asset, you can earn more, but you will also need more money to cover your position if things go the opposite way. In this case, if you can’t fulfill the margin requirement, your fund will be liquidated to cover your loss automatically.

Future trading is capital efficient. That is to say, you can make use of leverages while buying and selling futures contracts. For example, you would need thousands of dollars to buy 1 BTC on the spot market. But you can open a BTC futures position at a fraction of the cost depending on the leverage rate you are putting in use. You can hedge using futures contracts to reduce the risk factor of your investments.

Due to the high volatility in the Bitcoin market, the risk factor increases with futures trading. For this reason, if you are a beginner, we strongly advise you to be cautious if you decide to try trading futures.

Binary Options Trading

Binary options are call vs. put options, which you can use to short Bitcoin. It is basically a bet on whether the price will increase or decrease. They’re called binary options because the amount of money you get doesn’t depend on the change in the asset’s price. It is a simple matter of yes or no. If the binary option expires in the money, you gain the predetermined amount, and if the binary option expires out of the money, you lose the negotiated amount.

Binary options trading is an all-or-nothing game because of its duality. If you win, you win it all. If you lose, you lose it all. And if your prediction doesn’t come true, there is no loss minimization strategy you can adopt.

However, just like the losses, so, too, the gains are capped in binary trading. When the market moves in the direction of your prediction, you make the same profit, even if it overshoots your initial prediction.

Prediction Markets

Prediction markets in cryptocurrency trading are similar to the futures market. The difference is that the predictions market involves a group of people speculating on various events, such as exchange averages, quarterly sales results, or even election results. You can think of it as a betting platform for various events, including the market price of Bitcoin.

Moreover, blockchain technology contributed to the prediction market overall. Thanks to the decentralised platforms it offers, we now enjoy more efficient prediction markets, which makes trading crypto easier.  You can create an event to make a wager based on the outcome in the prediction market. In other words, you could make a prediction on Bitcoin’s price falling by a certain percentage. If anyone takes up your bet, it is settled.

Prediction markets allow you to benefit from the wisdom of crowds by analysing and weighing vast numbers of predictions. However, a prediction is not a certain phenomenon; it’s a probabilistic event, meaning that it takes some statistical knowledge to weigh and derive insight from the prediction market correctly.

Typically, prediction markets are separate platforms from regular crypto exchanges. Today, the most popular ones are Augur, Gnosis’ and Polymarket.

Bitcoin Contract For Differences (CFDs)

Bitcoin CFDs are similar to Bitcoin futures. A CFD is a financial strategy that yields profit based on the difference between the opening and closing prices of a settlement. But unlike online Bitcoin futures, CFDs don’t have predetermined settlement dates, which gives them a more flexible reputation.

You don’t actually deal with the underlying asset when investing in CFDs. Instead, you get the right to receive the difference between the current cost of an asset and its future price.

Unlike direct Bitcoin trading, which is quite technically intensive, CFD trading has a more accessible nature since you don’t buy and sell actual crypto assets. You just obtain the right to collect the difference between their value over time. For this reason, you don’t need a crypto wallet or an account on a crypto exchange.

Still, CFD crypto trading comes with a price, depending on your asset’s liquidity and risk factors. Even if your prediction was correct, you need to pay for the service. Thus, you initially experience losses.

Inverse Exchange-Traded Products

Inverse ETP (exchange-traded products) are also bets on the price movements of an asset, but they are very limited instruments in terms of accessibility. They use futures contracts in conjunction with other derivatives to produce returns. They are only available on 21Shares Short Bitcoin ETP and BetaPro Bitcoin Inverse ETF (BITI) which you can buy from online brokerage services such as Charles Schwab, or Fidelity Investments.

Because ETFs act as a counterbalance to other investment instruments, you can distribute the risk factor on your portfolio. ETFs are likely to underperform in the long run. For this reason, if you cannot pay close attention to your investment at all times, you should stick to the other instruments.

Things to Consider When Shorting Crypto

Technical Analysis

The pricing of an asset depends on many different factors such as current market prices of other assets, regulations, demand and supply over time, the coin’s popularity, etc. It’s impossible to analyze all these to tell how the market will move. But you can make use of past Bitcoin data, such as trading volume and price movement to make an informed decision.

In technical analysis, rather than pulling apart the determinant factors of market prices, we simply trust that history will repeat itself in terms of trends so we can simplify the complex web of variables. The most appealing part of technical analysis is the widely available and public data on the cryptocurrency market and Bitcoin. You can use TradingView or any other service to examine how the trends in Bitcoin to short at the right time.

Fundamental Analysis

Even though some say that cryptocurrencies don’t possess any fundamentals since they belong to a very young market, you can still use fundamental analysis to strengthen your hand in investing in Bitcoin.

Fundamental Analysis is studying the intrinsic value of Bitcoin. You examine both external and internal factors to see if an asset is undervalued or overvalued. These factors are commonly examined with the following three metrics:

  • On-chain metrics – metrics of the total data on the blockchain. You can obtain this metric through various sources. One of them is Bybit.
  • Transaction count – the number of transactions in a specific cryptocurrency.
  • Transaction value – the number of transactions completed in a certain period.

Keep Up to Date With the News

Trends in Bitcoin are highly correlated with what is going on in the real world. You don’t have to be an economist to understand what kind of developments might reduce or increase Bitcoin’s demand, which consequently decreases or increases its market price. For example, if the Fed announces an increase in interest rates, you would expect people to direct their investments toward deposit accounts on banks. Such a trend would decrease the demand for Bitcoin. For this reason, following the news is a good idea when investing in any market, and not only crypto-related ones, since political and economic events can send a market in any direction.

Risks of Shorting Bitcoin

Price Volatility

Most of the instruments to short Bitcoin depend on derivative trading. A sudden price drop can create a domino effect on your gains and losses.

Insufficient Data to Analyze the Bitcoin Market

Cryptocurrencies have been around for a decade, and it has been even less than that since they turned into mainstream investment instruments. Therefore, one can argue that there isn’t sufficient data or information to make an educated decision in terms of investments. For example, there are still several issues related to Bitcoin forks, such as scaling problems and the adoption of the Lightning Network or SegWit.

Plus, while established trading platforms, such as CME, are safer and can guarantee execution, there are many dodgy platforms out there and scams related to cryptocurrency investments.

The Regulatory Status of Bitcoin

The regulatory status of cryptocurrencies across the world is still vague because, for the most part, they operate as decentralised peer-to-peer payment platforms. This has allowed shady exchanges to continue drawing investors in. For example, there have been platforms that pulled an exit scheme like Thodex or Quadriga, leaving tens of thousands of investors behind with huge financial damage. Even though governments across the globe are increasingly working on cryptocurrency regulations, there are still certain risks associated with these assets.

A Few Words Before You Go…

Shorting crypto is a great way to extract value from a bearish market. There are many ways to do it on many different platforms, such as cryptocurrency exchanges or crypto brokerages. With the help of these services, you can short Bitcoin and other altcoins such as Ethereum (ETH), Litecoin (LTC), or Cordano (ADA). 

The best strategy to short Bitcoin depends on several factors, such as your risk preferences, available capital, and knowledge of the cryptocurrency ecosystem. Hopefully, after reading this article, you’ll know how to short cryptocurrencies and keep in mind both the advantages and disadvantages of the different strategies available to you.