As the market develops, new opportunities are created to take a position in bitcoin. How to short sell Bitcoin? In this post, we will explain how you can do it.
How to Short Sell Bitcoin
Before knowing how to do it, you should know: What is bitcoin short selling?
Short selling bitcoin is the act of selling cryptocurrency in the expectation that its value will drop to buy it back at a lower price. In this case, investors can profit from the difference in the market price.
However, short selling adopts a basic principle: “buy low and sell high, then reverse”: in other words, the investor sells the asset first and buys it back later.
Why Short Sell Bitcoin?
One of the reasons most people sell bitcoin short is to hedge long-term exposure. If you already own bitcoin but think it will go down in the short term, you can decide to reduce your risk by going short on the digital currency at the same time. In this way, if the market falls, the investor will be able to cover part of the loss on his initial investment with the profits on his short position.
Short selling the asset requires a good understanding of the market and knowledge of trading strategies. The cryptocurrency market is very popular, but also unpredictable. For this reason, traders need to take the time to understand the concept of bitcoin.
What is Bitcoin?
Bitcoin was created in 2009 by someone under the pseudonym of Satoshi Nakamoto. It is a digital currency that has no central authority, which has made it a very popular payment method. Also, being a decentralized currency, it is not subject to central banks and interest rates, which affect fiat currencies.
Ways to short sell Bitcoin
The first thing to do is to choose how to short sell bitcoin (there are several ways to short sell bitcoin ): through a broker or derivatives.
Traditional short selling
Some bitcoin exchanges offer short selling schemes, but this involves borrowing the actual asset from the broker or a third party and selling it on the market. If the market price falls, you could buy back the bitcoin at a lower price, returning it to its owner and benefiting from the price difference.
A disadvantage of this type of sale, however, is that it is nearly impossible to find a person willing to lend you a bitcoin to short sell, and if you find one, they could withdraw the bitcoin at any time and you could accept the current market price.
This is another alternative method of short selling bitcoin. Derivatives are financial instruments that derive their price from the underlying market, in this case, bitcoin. With derivatives, there is no need to borrow bitcoin from a third party, as you are only speculating on the future direction of the market.
The most popular derivative is a CFD. A contract to exchange the price difference of a bitcoin from the moment the position is open until it closes. In this case, you would open a position to sell a bitcoin if you believe it will drop in price.
However, CFDs are leveraged products, so you need to provide a small initial deposit (margin) to receive full market exposure. It is for this reason that short selling on margin can enlarge your profits if the market falls. It can also result in huge losses if the market moves against you.
We recommend that you always manage your risk when going short with derivatives such as CFDs. It is best to attach a guaranteed stop loss to your bitcoin position to protect your trade if the market moves against you.