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Everything You Need to Know About Shorting Bitcoin

March 30, 2018
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7 minutes read
Everything You Need to Know About Shorting Bitcoin

Bitcoin markets are currently going through quite a rough patch. There has been a lot of negative sentiment and FUD that has flooded the airwaves and driven the price lower. In times like this, it may not be entirely profitable to HODL your positions. Although Bitcoin is likely to recover to its all time highs again, there is no certainty as to when this could happen. This means that there could be a situation in which shorting Bitcoin in the short term could be a profitable venture. If there is potential for further downside then you can make returns on this trade. However, how do you go about shorting an asset such as Bitcoin? We will go over some of the most effective ways of doing this.

Using CFDs

One of the easist instruments that you can use to short Bitcoin is something called a Contract for Difference (CFD). This is a derivative instrument that functions in exactly the same manner as the name describes. You will enter a CFD at a particular price level either as a long or as a short and the payout will then be the difference between the level of the asset at the end of the day and the level that you entered in. This will be settled on a daily basis and the trader can keep their position open as long as they like. CFDs do not have a settlement date in the future but the account is margined and updated at the end of every day. In a similar fashion to Bitcoin futures, these instruments are also levered and hence returns / losses are magnified so they should be traded with caution. If you were in search of an effective CFD broker for all types of cryptocurrencies, then the IQ Option Cryptocurrency platform is probably your best bet. They have a slightly lower leverage than BitMex with a 1:20 leverage ratio. This means that they are slightly risky but will bring less returns. There are currently about 20 cryptocurrency pairs that you can trade on IQ Option.

Using Bitcoin Futures

For those of you who do not know, Futures are financial contracts whereby you enter into a agreement to buy or sell an asset at some time in the future. This could mean that it is a long (buy) or a short (sell) futures contract. If you are looking to short an asset then you will enter into a short futures contract for some time in the future. This will usually have a notional amount as well as a the expiry date of the futures contract. This expiry date is the day on which these will have to be settled. In most cases, there is no psychical settlement but there will be an adjustment in the amount of profit or loss there is on the contract. Futures are, however, a lot more risky than holding physical Bitcoin. Why is that you ask? This simply comes down to leverage. Leverage is where an individual will only need to put down a certain amount of margin in order to take a position that is much larger than that margin. They are therefore a lot more susceptible to small movements in the price (either up or down). There are a number of exchanges that are currently offering futures contracts on Bitcoin. One of the most established is the Bitcoin Mercantile Exchange (BitMex). They are based in Hong Kong and have a range of options for futures contracts. One of the most interesting characteristics though is the amount of leverage that they will allow on the exchange. In the case of Bitcoin, they allow for leverage of 1:100. This means that for you to take a position in 100 Bitcoin, all you will need is to place 1 bitcoin on BitMex. Of course, this makes it that much more risky. Hence you have to make sure that you have solid stop losses in place and that you do not trade with more than you are willing to lose.

Using Bitcoin Options

There is one more option that you can use where you are not exposed to the unlimited losses from a bitcoin price rally. These are Bitcoin Option type instruments. These essentially have an asymetric payout which means that the payout from gain and the payout from loss are not the same. There are two types of Bitcoin options that you can enter but as someone wanting to short the market, you will enter a PUT. The PUT option will pay you out if the price of Bitcoin is below the strike price at the time of expiry. There are a number of binary cryptocurrency brokers that you can make use of in order to enter your PUT options.

Conclusion

Although these are some of the easiest ways in which you can short its there are a range of other Bitcoin shorting methods that one can implement. Some offer the benefits of asymmetric payouts and others make use of correlated assets. While shorting Bitcoin is often seen as sacrilegious to the Hodlers, there are times when it can make sense based on technical analysis levels. Make sure that you are aware of some of the most important studies and breakpoints when shorting such a volatile asset class. Of course, one should always make sure that they are only risking as much as they are comfortable doing. Leverage can be a double edged sword and markets can be irrational. In fact, there is a well known saying in trading that goes: “The markets can remain irrational for much longer than you can remain solvent”