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Cryptocurrency is extremely volatile, and Bitcoin (BTC) is a perfect example of this. In 2021, it reached its all-time high of $67,500, and then dropped as low as $29,000. The rise and fall in values of smaller altcoins are even sharper. Solana’s price, for instance, rose from $1.8 at the beginning of the year to $259 by the summer before falling to $90 in early 2022.
Most investors who put their money into cryptocurrencies in the hopes that it will increase so they can sell it at a profit. However, only a tiny subsection of traders expects to profit from disaster and ruin. Those people who profit when the value of cryptocurrency declines are referred to as short traders.
But how do these individuals profit from making crash bets, and how to short cryptocurrency using comparable tactics?
The phrase going “short” on an asset is the opposite of going “long,” i.e., betting that its price will increase. It originates from the film The Big Short based on a novel by Michael Lewis of the same name. The film is about traders who earned a ton of money by correctly predicting the 2008 financial crash.
In real-time, Hindenberg Research is one of the most significant short sellers. After the investment firm released research claiming that the electric vehicle manufacturer was “an intricate fraud built on dozens of lies,” the price of the stock of Nikola Corporation fell.
But can you short Bitcoin? Simply put, you can.
Though short-selling is most frequently associated with the stock market, it is possible to short Bitcoin and other cryptocurrencies. many of them can be extremely volatile with the potential for large gains or losses over very brief periods of time. Hence, you can short crypto similarly to shorting stocks or other commodities.
When you short something, you’re betting on its decline in value and using different market derivatives and products to put yourself in a position to profit from it. The most popular way to short a coin is to borrow a lot of it and then sell it right away to someone else. Due to the fact that you will need to recover those assets to pay back the debt at a later time, you are left with a sizable financial hole.
How can you short Bitcoin? The main idea is that you use the money you made from selling it to repurchase that cryptocurrency later on at a lower cost. This is due to the fact that the debt is valued in cryptocurrencies rather than, say, USD. In the event that the value of the cryptocurrency plummets, you can purchase it all back at a discount and use the proceeds to pay back the loan.
It’s critical to realize that shorting any commodity, including cryptocurrency, is a sophisticated trading tactic that could quickly go wrong. While there is a chance of making a quick profit, shorting also necessitates extensive market and derivatives expertise.
Therefore, there are both benefits and risks of shorting cryptocurrencies to take into account. On the positive side, shorting enables you to gain from an asset’s price decline. So, if you anticipate a decline in the price of Bitcoin, you can sell short and profit when it happens.
Furthermore, shorting can assist you in protecting your portfolio from downside danger. Shorting a portion of your position can help offset losses in other areas of your portfolio if you’re concerned about a possible market crash.
Apart from being a means of earning a substantial amount of money, shorting can also be considerably risky. Simply having knowledge about the theoretical aspects of shorting crypto is inadequate, as there are specific factors that should be taken into account.
The lack of a cap on the amount you can lose if the price starts increasing makes shorting a risky strategy. You could potentially be caught in a “short squeeze” or a “bear trap,” resulting in significant financial losses. In addition, shorting demands precision and impeccable timing. To profit, you need to be correct about the market’s movement and the timing of your trade. Consequently, this strategy may not be suitable for everyone.
Shorting calls for a margin account with an exchange, which some buyers may find challenging to acquire. Therefore, the pressing matter becomes where to short cryptocurrencies. However, before deciding to take on such a position, it is essential to thoroughly assess all the potential risks and disadvantages involved.
If you’re considering shorting crypto as a part of your trading strategy, here are some factors to take into account.
The majority of Bitcoin shorting options rely on swaps. These derivatives are based on the price of Bitcoin. Changes in the price of the cryptocurrency have a domino effect on investors’ profits and losses.
For instance, since Bitcoin futures replicate changes in market prices, they cannot be used as a reliable hedge against investment in real Bitcoin. Similar to stock dealing, Bitcoin options trading can increase losses because of the underlying crypto price unpredictability.
You should consider several factors when shorting a cryptocurrency, including price. Compared to established assets, Bitcoin is still in its early stages. It has only been in existence for 13 years. As a result, there isn’t enough data or information available to allow buyers to make an informed choice about how it operates or whether it could be a viable investment.
For instance, there are still some unresolved Bitcoin fork-related problems. New platforms might initially be “clunky” and more vulnerable to hacks, whereas established platforms like CME are safer and ensure execution for Bitcoin derivatives.
Despite its claims of worldwide coverage, it is still unclear how Bitcoin is regulated globally. The majority of popular Bitcoin trading sites, including Deribit and OKEx, are inaccessible to American investors.
Exchanges can make offerings that would not be permitted if regulatory monitoring existed because there is no regulatory oversight. For instance, until 2021, Binance provided 125% leverage for trading Bitcoin futures. Customers of these exchanges have limited legal recourse because the regulatory position is unclear.
It’s important to realize that simply knowing how or where to short crypto isn’t enough. Make sure you familiarize yourself with different order types before you decide to short Bitcoin. If the price trend deviates from your original prediction, they can help limit losses. For instance, using stop-limit orders while trading derivatives can help keep your losses in check.
Having a strategy in place before engaging in complex trading techniques like shorting is a good option. Trading without a strategy or plan is closer to gambling than it is to real investing.
In the realm of short selling, the goal is to be as confident as possible that prices won’t rise soon, as this could lead to substantial losses. Rather than solely focusing on identifying negative market factors, it’s essential to recognize when positive influences are missing from the market.
Here is a summary of things to take into account before shorting Bitcoin using various shorting strategies.
Technical analysis (TA) can be used in a variety of methods to identify profitable shorting opportunities. Some typical signs include the following:
Moving averages (MAs): Moving averages can suggest a bearish or bullish sentiment when they cross each other in specific ways. A “golden cross,” for instance, occurs when the 50-day MA crosses the 200-day MA and is regarded as optimistic. Alternatively, a “death cross”—which is regarded as bearish—occurs when the 200-day MA descends below the 50-day MA.
This approach is less official and entails attempting to determine the general mood or sentiment of the market. For example, some websites compile the total number of tweets about various cryptocurrencies, both positive and negative. Although it is not an exact science, it is believed that when there is more favorable social media chatter about an asset, its value tends to increase.
Again, this is not a precise science, and market sentiment is frequently inaccurate. In light of this, exercise caution when attempting to determine the thoughts or emotions of the market.
The fundamental analysis applied to Bitcoin differs slightly from that applied to stocks and other commodities. Here are some important figures to remember when it comes to Bitcoin.
It might not be the best moment to short Bitcoin if any of these bullish indicators are present
As shorting Bitcoin depends on a variety of factors, some of which we’ve already mentioned, you need to make sure you’re following the correct strategy. The last thing you want is to short-sell cryptocurrency during a fake recovery. Here are some pieces of advice to help you out.
Technical analysis is the process of predicting future market behavior using real-world data. To do this, you should examine the success of the currency you’re interested in in the past, including its movement and volume. For instance, if you’d like to find out if you can short Bitcoin and how to do it, you would compare the selling volume of Bitcoin today to that over the previous few months.
The central tenet of technical analysis is that pricing and trend patterns have a history of repetition. The upcoming market sentiment is then predicted using this information, Technical analysis operates on the idea that fluctuations in the cryptocurrency market aren’t entirely random, but instead follow patterns that can be either short-term or long-term in nature. Usually, a cryptocurrency is likely to exhibit a reverse pattern if it has previously followed a particular trend.
If you choose to short-sell Bitcoin, it’s crucial to know more than just how to short crypto. You also need to pinpoint the best time to sell. To achieve this, stay informed with current events, which includes more than just crypto news. Political and economic factors can also impact the market significantly. Sudden government crackdowns or new regulations can cause the crypto market to plummet unexpectedly.
If you anticipate a similar event happening, you can take advantage of the situation by shorting cryptocurrencies during a bear market. However, make sure to stay within legal boundaries and adhere to all regulations, as failing to do so could lead to significant trouble.
You can research a currency’s intrinsic worth using fundamental analysis. To decide whether an asset is undervalued or overvalued, you should consider both internal and external factors such as supply and demand or popularity and adoption. Since cryptocurrency’s fundamental analysis isn’t the same as that of traditional markets, different metrics are used.
You can get a good sense of the activity on a network by looking at the transaction count. To see how the activity around an asset changes over time, you can plot a particular time frame or even use moving averages.
Use this measure with care, though. There is no assurance that a high transaction count is the result of distinct live addresses or that the same individuals are moving money between their various wallets.
You can find out the total amount of funds transferred over a specific period by looking at the transaction value. For example, if ten people transferred Bitcoin in a single day, there would be ten transactions. If each Bitcoin was worth $40,000, the total daily transaction value would amount to $400,000.
When you’re shorting a cryptocurrency, you’re basically betting against its price. You borrow cryptocurrency from a broker or exchange, sell it, and then try to purchase it back at a lower cost. At the exchange level, all “borrowing and returning” occurs automatically, and you benefit from the difference.
The only distinction between shorting Bitcoin and shorting any other cryptocurrency is the asset you’re shorting. You gain money when the price of bitcoin decreases; you lose money when the price increases.
However, it’s worth noting that short-selling Bitcoin can be complicated and risky. Shorting any commodity carries a higher level of risk than other forms of investing, and even experienced traders may find it challenging to make a profit. Still, implementing adequate strategies should make shorting Bitcoin less complicated.
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