How to Short Bitcoin: Ultimate Guide

bear market for btc sell abd purchase

Cryptocurrency exchange rate can change several times a day. Just like fiat exchanges, there are two main behaviors among cryptocurrency players: some of them buy coins at a low price (as most traders do), or purchase coins at their peak during the all-time high period. It is easier to buy a currency at a low price and wait for its growth. None of the coins has ever shown an increase without a fall, so a cryptocurrency trader needs to be able to short.

How to Short Bitcoin?

Short-selling is a trading practice that lets you benefit from a drop in an asset’s price. To put it simply, it involves selling an asset you don’t own and then buying it back later. It goes like this:

  1. You borrow an asset
  2. You sell it
  3. You repurchase it when the price drops

Obviously, that’s not all there is to it. Since you’re borrowing the asset you’re selling, its original owner can request you to return it – not personally (since all this is done via a third party service like a broker or an exchange), but automatically – and then you will be forced to buy the asset back at the current market price. Go to the Risks of Shorting Bitcoin section to learn more about this. 

Can you Short Bitcoin and What Does Shorting Mean in Crypto?

Shorting in crypto means the same thing it does in traditional trading – you sell Bitcoin you don’t own and buy it back later at a lower price.

Imagine a scenario in which you think that Bitcoin price is going to drop soon, either because you’ve done your own research or have read somebody else’s (remember to never blindly follow other people’s financial advice!). To profit from this knowledge, you borrow 1 BTC from an exchange and sell it for $60,000. A week later, just as you predicted, Bitcoin drops down to $40,000 – and you promptly buy back that 1 BTC you borrowed, leaving you with $20,000 of profit.

The Risks of Shorting Bitcoin

If everything goes according to plan, then you will be able to buy back the assets you borrowed at a lower price and make a hefty profit. Unfortunately, things rarely go according to plan – and especially so in a market as volatile as crypto. 

The biggest downside of shorting is that there is technically no limit on how much money you can lose. When you short Bitcoin, you open a position. Usually, you yourself choose when to close that position (buy back the asset you borrowed) – but that’s not always the case. If a margin call is issued, then your broker or exchange will automatically buy back the assets you borrowed using the funds on your account.

However, sometimes that is not possible – the market may not be open or the demand may far outweigh the supply – and in such cases, the buy-back price can even exceed your account balance, forcing you to become indebted to the exchange. However, that happens very rarely. Still, make sure to always be careful and always monitor the market and the price of the asset you want to buy.

Where to short bitcoin – 5 Ways to Short Bitcoin

Well, now you’re probably wondering, “How do I short Bitcoin?”. Don’t worry, it’s really easy! As crypto became more popular, a wide variety of trading platforms fit for every kind of user has emerged. Here are the best platforms for shorting Bitcoin:

  1. Great for beginners – Changelly PRO
  2. Great for experts – Binance

How you short Bitcoin will depend on several factors, including but not limited to your risk aversion, your available funds, your level of expertise, and so on. Here are the 5 main ways in which you can short crypto. 

Margin Trading

This is one of the easiest ways to short Bitcoin. 

Getting a margin account on Changelly PRO is as easy as ABC! All you need to do is enable 2-factor authentication and pass KYC. That’s it!

Margin trading also allows you to use leverage – meaning you can borrow more money from an exchange than you have deposited on your account. While this opens up doors for higher profits, it is naturally riskier, too – your position may close sooner than you expected if you’re engaging in leveraged shorting. 

Learn more about margin trading in our ultimate guide: Margin Trading on Changelly PRO.

Futures Market

Just like other assets, Bitcoin has a futures market. In a futures trade, you basically agree to buy an asset – in our case, BTC – on a condition that it will be sold later at a predetermined price. This agreement is called a futures contract. 

However, it is also possible to sell futures contracts – in that case, unlike when buying them, you will be able to benefit from the asset’s price dropping. 

Read more about the futures market here.

Binary Options Trading

Binary options trading allows you to bet on “yes or no” scenarios. You basically bet on whether an asset’s price will go up or down. To short sell cryptocurrency using this method, purchase put options.

Binary options trading offers great flexibility and higher-than-usual leverage. We would advise against engaging in it unless you’re an expert trader.

Prediction Markets

Prediction markets are somewhat similar to betting agencies for sports. Such platforms haven’t been around for long in the crypto industry, but are a good way to short Bitcoin. They allow you to make a wager on a specific outcome, such as “Bitcoin is going to fall by 10% next week”. If somebody takes you up on the bet, you can make quite a hefty profit. 

Short-Selling Bitcoin Assets

If you have enough of your own funds, you can also short sell Bitcoin directly. All you need to do is sell BTC when the price is high and then buy back when it’s low. This method of short selling Bitcoin is relatively beginner-friendly, as you don’t need to learn how to use trading platforms to utilize it. It is also a lot less risky, since you can’t lose more than you own, but also less profitable. As always, the higher the risk, the higher the reward.

Is Short Selling Bad? Things to Watch out for

Just like other trading practices, short selling requires you to be careful and informed. Thoroughly research all assets you’re planning to short and only ever spend money you can afford to lose.

Risk

Shorting is a high risk, high reward activity. In fact, it is one of the riskiest ways to make money, since your profit is limited while your losses are not.

Besides what we’ve already mentioned, another risk you should look out for are potential regulations. There have been bans issued on short selling in the past, forcing traders to cover their positions at big losses. 

Short selling is also not fit for traders who don’t know how to stop themselves. If you know you have a hard time calling your losses, we would advise you against trying shorting.

Volatility

It’s no secret that the crypto market is highly volatile, which presents obvious challenges when short selling: the price of Bitcoin can change quite drastically at any point. Some people use complex analysis to predict price movements, but even the most well-researched predictions aren’t correct 100% of the time. 

This spring we saw how one tweet can crash BTC price – or send it straight to the moon. With prices being so unpredictable, short selling becomes somewhat of a gamble. However, there’s a way to safeguard yourself against extreme market volatility: stop-loss orders.

A stop-loss order is an order placed with a broker or an exchange that will sell/buy the asset once that its price reaches a certain point.

Conclusion

Short selling Bitcoin is a good way to make a profit if you are confident in your ability to research the market. Besides the ones that we’ve mentioned here, there are also other ways to short sell Bitcoin, like spread betting or CFDs trading. If you’re interested in shorting cryptocurrency, we encourage you to start with something relatively easy and not rush straight into complex strategies. 

Remember to always do your own research and make sure to only invest what you can afford to lose. And if you need a reliable launchpad to kickstart your trading journey or you want to try out some of the things we’ve mentioned here, check out Changelly PRO, our full-featured yet easy-to-use trading platform.

Short Selling Bitcoin FAQ (Frequently Asked Questions)

Do you lose money if Bitcoin goes down?

No, because of the nature of shorting, you will actually make a profit if Bitcoin’s price drops.

Is short selling unethical?

To a non-trader, short selling may seem unethical and even downright evil – after all, you’re basically betting on a business or asset doing badly. Since so many people are passionate about Bitcoin as a technology, they may see betting against the cryptocurrency’s success as something negative.

However, this couldn’t be further from the truth. Short sellers, to a certain extent, are very beneficial to any market. In addition to providing liquidity, they also prevent asset prices from inflating too much. Of course, there are unethical short sellers who use strategies like “short and distort”, but it’s not that different from people who use “pump-and-dump” schemes in traditional trading. At the end of the day, it’s not the activity itself that’s unethical – it’s the (few and far inbetween) people who indulge in unethical practices.

What happens if a short seller defaults?

In most cases, that will never happen – your position will be closed once the price of an asset goes up and a margin call is issued. However, if the price rises significantly while the markets are not open and the loss you incurred can’t be covered by your account balance, the exchange/broker will have to chip in and assist you with closing your position. They can sue you afterwards to get that money back. 

Is there a way to short Dogecoin?

Yes, you can short any cryptocurrency, including Dogecoin, Ethereum, and many others. It all depends on what trading pairs are available on your exchange of choice.  

Is shorting morally wrong?

No, short selling isn’t morally wrong. As we have mentioned above, it can even be beneficial. In addition to what we’ve already said, short sellers can also help to expose financial fraud – since one has to do a lot of research in order to short sell successfully, short sellers usually notice mistakes, inflated numbers, etc. in financial reports.

How do you know if a stock is being shorted?

To learn whether the stock is being shorted, look at its long/short ratio. This is also a great way to look out for short squeezes – a situation where there are significantly more short than long positions for an asset. It is usually a harbinger of price spikes. 

Can you hold a short position forever?

Well, yes. However, in reality no short position is held forever. 

Your position can be closed for two reasons: either you’ll close it yourself when the market price of the asset you borrowed drops enough for you to make the profit you wanted to get, or it will be closed automatically because the price has risen too far. Of course, technically it’s possible that the price remains the same, but it’s more than highly unlikely. Alternatively, you can lose access to your trading account or forget that you opened a trade.

About Changelly

Changelly is a non-custodial instant cryptocurrency exchange service, that acts as an intermediary between crypto exchanges and users, giving an opportunity to exchange over 200 cryptocurrencies at the best market rates. 

Operating since 2015, the platform and its mobile application attract over a million visitors monthly who enjoy high limits, fast transactions, and 24/7 live support. Changelly offers its API and a customizable payment widget to any crypto service that wishes to broaden its audience and implement new exchange options.

Official website: https://changelly.com/

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