It’s possible to short Bitcoin using a handful of different strategies. And as the crypto markets remain tumultuous, knowing how to short Bitcoin and other cryptocurrencies can be useful to investors.
Shorting is a way of profiting from an asset’s falling price. Volatile assets like Bitcoin can provide an opportunity for this type of trading. But be warned: Short selling is a more advanced trading strategy as it requires exact timing and can involve much more risk than just buying or selling something. Here, we’ll cover how to short sell Bitcoin, some places it can be done, and what risks to keep in mind.
Can You Short Bitcoin?
Yes, it is possible to short Bitcoin. Shorting Bitcoin is effectively the same as shorting a stock, as an investor is making a bet that the asset will lose value.
There are a handful of different ways that an investor can choose to short Bitcoin. Generally, the idea behind shorting is that you would borrow a certain amount of Bitcoins, and sell them at their current price. Then, in the future, you’d purchase Bitcoins to repay the loan — at which point, theoretically, the price would have dropped. So, you’d be paying back the loan with Bitcoins that were cheaper than the ones you borrowed.
You would then profit off of the difference between the two prices when the Bitcoins were sold and repurchased. It’s similar, in some ways, to cryptocurrency arbitrage.
The benefit to shorting Bitcoin is that it allows investors to generate a profit in a down market. The drawback is that shorting involves more risk and is more complex than just buying or selling something.
Take a step back: Learn more about Bitcoin, its origins, and how it works.
Example of Shorting Bitcoin
Here’s how shorting Bitcoin may look in a practical sense:
You anticipate that the price of Bitcoin will fall in the coming days or weeks. So, you plan to short sell five Bitcoins. You borrow those Bitcoins, and sell them for, say, a total of $100,000 ($20,000 each). Two weeks later, the value of Bitcoin has fallen 20%, and BTC is now trading at $16,000.
You would then repurchase the five Bitcoins you sold, spending a total of $80,000 ($16,000 each). You repay the lender the five Bitcoins, and pocket the difference. Effectively, by shorting, you’ve netted $20,000.
How to Short Bitcoin: 5 Different Ways
There are several different methods for shorting Bitcoin. Here are some of the most popular among crypto investors.
Shorting Bitcoin on Exchanges
Perhaps the most straightforward way to short Bitcoin would be to create an account on a crypto exchange that offers this feature. These exchanges make it easy for users to borrow Bitcoin, sell it short, then buy it back at a lower price. Some exchanges that allow for this include Kraken, Bitmex, Bitfinex, eToro, and Binance.
But note that not all exchanges allow users to short crypto. In that case, they may have to turn to other methods to short Bitcoin.
Does Coinbase Allow Shorting?
Coinbase users asking the question “can you short cryptocurrency” will find that the answer is no.
Shorting Bitcoin with Futures Contracts
A futures contract is an agreement between two parties to buy or sell something at a certain price on a specific date. These can be used to trade Bitcoin, and Bitcoin futures contracts have been around for several years now. Using futures, a trader can short Bitcoin by buying a contract with a lower Bitcoin price at some point in the future.
Again, this would help an investor profit if they were anticipating a fall in Bitcoin’s price. They could then exercise the contract and purchase Bitcoin at a lower price than market value. It’s important to keep in mind, though, that futures are an advanced trading method and come with high risk.
Shorting Bitcoin with Options Contracts
Options are similar to futures in that they are both forms of derivatives — financial instruments that derive their value from an underlying asset.
Options contracts give holders the option, but not the obligation, to buy or sell an asset at a certain price during a specific period of time.
There are several different options trading strategies out there, too.
Bitcoin put options could be used as a way to short Bitcoin. At the time of purchase, an investor only has to risk the premium (essentially, a purchasing fee) for buying the option contract, which is typically a small amount. Still, options are complex and can lead to large losses for traders unsure of what they’re doing.
Shorting Bitcoin with Leveraged Bitcoin Trading
There are some financial intermediaries that offer leveraged trading products like spread betting and contracts for difference (CFDs). These might be the riskiest of all possible ways to short sell Bitcoin, because they involve making leveraged bets.
Leverage involves betting with more money than you actually have. This can lead to increased gains for positive-yielding trades, but can also lead to investors losing much more than they risked, and falling into debt when trades don’t go their way.
Short-Selling Strategies for Crypto
When engaging in sophisticated trading methods like shorting, it’s a good idea to have a plan going in. Making trades without some kind of strategy or plan is more akin to gambling than serious investing.
When it comes to short selling, the goal is to be as certain as possible that prices won’t rise in the near-term, since this could lead to substantial losses. Therefore, it’s important to recognize when bullish factors are not present in the market, rather than only looking for bearish factors that are present.
Here is a list to consider when considering to short sell Bitcoin using different shorting strategies.
Technical Analysis
There are many different ways to use technical analysis (TA) to find shorting opportunities. Some common indicators include:
• Relative Strength Index (RSI): This indicates when an asset might be overbought or oversold. A reading above 80 is thought to indicate overbought conditions, meaning prices could fall soon.
• Bollinger Bands: These indicate when an asset is poised for a big move in one direction or the other. If Bollinger Bands tighten to a narrow range on a chart during a time when other bearish developments are occurring, prices could be getting ready to head lower.
• Moving Averages (MAs): When they cross each other in certain ways, moving averages can indicate bearish or bullish sentiment. For example, when the 50-day MA moves above the 200-day MA, this is referred to as a “golden cross,” and is thought to be bullish. Conversely, when the 200-day MA moves below the 50-day MA, this is referred to as a “death cross,” and is thought to be bearish.
Sentiment Analysis
This method is less formal. It involves trying to gauge the market’s overall mood, or market sentiment. For instance, there are some websites that aggregate the total amount of negative and positive tweets about different cryptocurrencies. While this is not an exact science by any means, it’s thought that the values of assets tend to rise in price when there’s more positive social media chatter about them.
Again, this isn’t an exact science, and market sentiment can often be wrong. With that in mind, tread carefully when trying to read the minds or moods of the market.
Fundamental Analysis
Using fundamental analysis for Bitcoin looks a little different than using fundamental analysis for stocks and other assets. Here are a few key metrics to keep in mind when it comes to Bitcoin.
• How’s the network activity? Are there a lot of new users coming into the market, creating wallets and buying coins? If so, this could be a bullish signal.
• What are miners doing? Are miners holding coins or selling them right away? When miners hold coins, it means they think prices are going to rise, indicating bullish sentiment. It could be helpful to understand how bitcoin mining works in this regard, too.
• Are coins moving toward or away from exchanges? Many crypto-oriented media outlets often report on the volume of coins leaving or entering exchanges. When people move large amounts of crypto off exchanges, it means they plan on holding for the long-term, which could be bullish.
If one or more of these bullish factors are present, it might not be the best time to try to short Bitcoin.
When Should You Consider Shorting Bitcoin?
In the simplest terms, investors who are willing to assume the risks associated with short-selling should do so when they think that an asset’s value will fall. It may be helpful to think of shorting as “making a bet against,” and as such, if you were under the impression that Bitcoin’s value was going to decline in the days, weeks, or months ahead — after doing lots of research, of course — that might be the time to short it, if it aligns with your investment objectives and risk tolerance.
Conversely, if you were anticipating Bitcoin’s value rising in the future, perhaps because it is currently undervalued by the market, you would not short it. Instead, that may be the time to engage a buy-and-hold investing strategy in an effort to earn a return.
Is Shorting Bitcoin Risky?
Shorting anything involves substantial risk. Perhaps the most important thing that investors should understand about shorting is that it can result in unlimited losses.
This can occur because there’s no upward limit on the price of Bitcoin. After having entered a short position, traders take a loss if the underlying asset goes up. The more the price rises, the more losses pile up. In this way, an investor who is short Bitcoin can lose all of their investment quickly if the price doesn’t retreat. This risk can be hedged using a stop-loss, which will automatically close out a trade at a specific price level.
The Takeaway
Investors can short Bitcoin, but it’s often an involved and complicated process. Not to mention risky — short-selling any asset is generally riskier than other investing activity, and it can be difficult to turn a profit even for experienced traders. But by shorting on exchanges through margin, or using futures and options contracts, intrepid crypto investors can short Bitcoin.
Learn More:
This article originally appeared on SoFi.com and was syndicated by MediaFeed.org.
SoFi Invest
The information provided is not meant to provide investment or financial advice. Also, past performance is no guarantee of future results.
Investment decisions should be based on an individual’s specific financial needs, goals, and risk profile. SoFi can’t guarantee future financial performance. Advisory services offered through SoFi Wealth, LLC. SoFi Securities, LLC, member FINRA / SIPC . SoFi Invest refers to the three investment and trading platforms operated by Social Finance, Inc. and its affiliates (described below). Individual customer accounts may be subject to the terms applicable to one or more of the platforms below.
1) Automated Investing—The Automated Investing platform is owned by SoFi Wealth LLC, an SEC registered investment advisor (“Sofi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC, an affiliated SEC registered broker dealer and member FINRA/SIPC, (“Sofi Securities).
2) Active Investing—The Active Investing platform is owned by SoFi Securities LLC. Clearing and custody of all securities are provided by APEX Clearing Corporation.
3) Cryptocurrency is offered by SoFi Digital Assets, LLC, a FinCEN registered Money Service Business.
For additional disclosures related to the SoFi Invest platforms described above, including state licensure of Sofi Digital Assets, LLC, please visit sofi. Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform. Information related to lending products contained herein should not be construed as an offer or prequalification for any loan product offered by SoFi Bank, N.A.
Crypto: Bitcoin and other cryptocurrencies aren’t endorsed or guaranteed by any government, are volatile, and involve a high degree of risk. Consumer protection and securities laws don’t regulate cryptocurrencies to the same degree as traditional brokerage and investment products. Research and knowledge are essential prerequisites before engaging with any cryptocurrency. US regulators, including FINRA , the SEC , and the CFPB . PDF File, have issued public advisories concerning digital asset risk. Cryptocurrency purchases should not be made with funds drawn from financial products including student loans, personal loans, mortgage refinancing, savings, retirement funds or traditional investments. Limitations apply to trading certain crypto assets and may not be available to residents of all states.
2Terms and conditions apply. Earn a bonus (as described below) when you open a new SoFi Digital Assets LLC account and buy at least $50 worth of any cryptocurrency within 7 days. The offer only applies to new crypto accounts, is limited to one per person, and expires on December 31, 2022. Once conditions are met and the account is opened, you will receive your bonus within 7 days. SoFi reserves the right to change or terminate the offer at any time without notice.
More from MediaFeed:
What is Bitcoin cash? Bitcoin vs. Bitcoin cash
Bitcoin Cash (BCH) was designed to improve on the original Bitcoin. And while it hasn’t knocked Bitcoin off its perch as the top crypto, it has gained many advocates. This article will explore the history of Bitcoin Cash, its uses, and whether it’s a good investment for investors looking to buy cryptocurrency.
Topics covered include:
DepositPhotos.com
Bitcoin Cash (BCH) is a cryptocurrency that was originally based on Bitcoin. It launched in 2017 to address what some bitcoin miners and investors saw as emerging issues with Bitcoin’s transaction speed and its prospects for long-term growth.
Created in 2009, Bitcoin was the first cryptocurrency, and is currently the best-known and most-used form of crypto. Bitcoin Cash was the first form of cryptocurrency to fork from the original Bitcoin blockchain software protocol. And today, BCH is the largest Bitcoin fork, by both market capitalization and active users.
Like all forms of crypto, BCH uses blockchain, or distributed-ledger technology. That technology employs a host of independent computers, called nodes, to track and coordinate transactions. This idea was revolutionary when Bitcoin came out in 2009 and upended the existing trading models that had depended upon a central clearinghouse or exchange.
Each node in the blockchain constantly organizes new data into blocks, and chains it together in an “append only” format, which prevents any one node from altering or deleting the data in earlier blocks. Blockchain is what protects Bitcoin from copying, counterfeiting or double spending.
Jirapong Manustrong / istockphoto
But blockchain also has its drawbacks. And BCH was created to address some of those drawbacks as they began to emerge over the course of Bitcoin’s growth (and that of other types of cryptocurrency) into a unique part of the financial landscape.
One of the biggest questions about Bitcoin was how it would perform as it handled more transactions. When someone buys or sells a bitcoin, the transaction is processed, verified, and stored within the coin’s blockchain. Because blockchain depends on so many nodes to verify a transaction, and because the network of nodes is decentralized, transactions can be slow.
The entire Bitcoin network can handle about seven transactions per second. By contrast, Visa can process roughly 24,000 transaction messages per second. As a result, Bitcoin transactions can take several minutes to process, with wait times only growing longer as the number of Bitcoin users grow.
BCH is designed to handle more users, and to shorten transaction times. The developers behind the cryptocurrency did this by reducing the quantity of information that needs to be verified in a block of the chain. They also made the blocks of data bigger, so more data can be processed at one time. Bitcoin Cash can process 116 transactions per second.
Cemile Bingol/istockphoto
Bitcoin Cash forked off from Bitcoin on August 1, 2017. Forks have become a common occurrence in cryptocurrency. They typically happen when the systems underlying a given currency undergo an upgrade or update. It can also happen when a large enough group of the miners of a given currency choose to change the rules of the network.
A currency forks in the same way that a path can fork, with each branch going its own way. Each forking path has its own separate open-source code designed to work together to assist in the main function. There are two kinds of forks: hard forks and soft forks.
If the software protocol of a currency changes in such a way that the older protocol version is no longer valid, it’s called a hard fork. One risk of a hard fork is if an older protocol is still running, then it can lead to confusion and even loss of funds.
In a soft fork, on the other hand, the new changes continue to work with the older protocols, and the old version accepts the newer version. For a soft fork to be implemented a majority of the network on the blockchain has to accept it.
Bitcoin Cash was formed as a hard fork in the software protocols of Bitcoin. As a result, BCH has its own separate blockchain. To reduce confusion, it took on its own name. Different as it may be, it is still subject to the same cryptocurrency rules and regulations Bitcoin is.
Stanislav Palamar/istockphoto
BCH wasn’t the end of the forking process, however, the Bitcoin Cash network had its own hard fork in November of 2018. This led to the creation of Bitcoin SV, whose backers say is truer to the original vision of bitcoin inventor Satoshi Nakamoto, while offering faster transaction speeds the potential for greater scalability.
The main difference between Bitcoin, Bitcoin Cash, and Bitcoin SV is their block size. And while Bitcoin is the original cryptocurrency, Bitcoin Cash and Bitcoin SV are considered altcoins.
peterschreiber.media/istockphoto
While Bitcoin and BCH are very similar, there are some core differences written into the technological DNA of BCH. To accelerate the verification process, BCH increased the data in each block on the chain in its protocol to 8 MB when it launched, up from Bitcoin’s 1MB.
Eventually BCH took it a step further, increasing the size of the blocks to 32 MB. As a result of these improvements, the BCH network can support 23,040,000 transactions per day. While that pales in comparison to the more than two trillion transactions that (to continue our example from above) Visa can handle on a given day, it is far more than the 600,000 transactions that Bitcoin can facilitate daily.
But that speed may not necessarily translate for BCH users. Because Bitcoin is far and away the most popular cryptocurrency in the world, it offers far greater usability and liquidity than BCH. And while BCH has much higher transaction capacity, it hasn’t needed it so far.
SKapl / istockphoto
As of late January 2021, Bitcoin Cash was the ninth-largest cryptocurrency by market cap, with roughly $8 billion, according to CoinDesk. That is just a fraction of the $900 billion market cap of Bitcoin.
As anyone acquainted with the basics of cryptocurrency investing may know, BCH and many other forms of crypto have taken investors for a wild ride in recent years.
Its price peaked in late December of 2017 at $3,785, in the midst of a dramatic rally for cryptocurrencies as a category. But its value has dropped just as dramatically since then, going as low as $180 in March of 2020. That said, nearly every cryptocurrency in the 2017 bull market has fallen similarly. BCH is back up to $429 in late January 2021.
One benchmark for potential BCH investors is how the currency is performing relative to its parent currency, Bitcoin. There have been times when a BCH coin was worth as little as 0.0021—or roughly one five hundredth—of a single bitcoin. But BCH has since rallied from those all-time lows to .013—or more than one percent—of a bitcoin as of late January 2021.
Another consideration when investing in cryptocurrency is the tax implication. The IRS considers crypto to be property, and investors may owe capital gains taxes if they see a profit on their investment. Anyone thinking of investing in crypto might want to review our comprehensive guide to taxes and cryptocurrency.
David Shares on Unsplash
Bitcoin Cash, an offshoot of the biggest cryptocurrency, promises faster transactions and better scalability. But it’s still worth a fraction of Bitcoin, which also boasts better usability and liquidity.
There are many different cryptocurrencies for investors to learn about and invest in beyond Bitcoin and Bitcoin Cash.
Learn More:
This article
originally appeared on SoFi.comand was
syndicated by MediaFeed.org.
Crypto: Bitcoin and other cryptocurrencies aren’t endorsed or guaranteed by any government, are volatile, and involve a high degree of risk. Consumer protection and securities laws don’t regulate cryptocurrencies to the same degree as traditional brokerage and investment products. Research and knowledge are essential prerequisites before engaging with any cryptocurrency. US regulators, including FINRA , the SEC , and the CFPB , have issued public advisories concerning digital asset risk. Cryptocurrency purchases should not be made with funds drawn from financial products including student loans, personal loans, mortgage refinancing, savings, retirement funds or traditional investments.
SoFi Invest
The information provided is not meant to provide investment or financial advice. Investment decisions should be based on an individual’s specific financial needs, goals and risk profile. SoFi can’t guarantee future financial performance. Advisory services offered through SoFi Wealth, LLC. SoFi Securities, LLC, member FINRA / SIPC . SoFi Invest refers to the three investment and trading platforms operated by Social Finance, Inc. and its affiliates (described below). Individual customer accounts may be subject to the terms applicable to one or more of the platforms below.
1) Automated Investing—The Automated Investing platform is owned by SoFi Wealth LLC, an SEC Registered Investment Advisor (“Sofi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC, an affiliated SEC registered broker dealer and member FINRA/SIPC, (“Sofi Securities).
2) Active Investing—The Active Investing platform is owned by SoFi Securities LLC. Clearing and custody of all securities are provided by APEX Clearing Corporation.
3) Cryptocurrency is offered by SoFi Digital Assets, LLC, a FinCEN registered Money Service Business.
For additional disclosures related to the SoFi Invest platforms described above, including state licensure of Sofi Digital Assets, LLC, please visit www.sofi.com/legal. Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform. Information related to lending products contained herein should not be construed as an offer or pre-qualification for any loan product offered by SoFi Lending Corp and/or its affiliates.
Third Party Brand Mentions: No brands or products mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third party trademarks referenced herein are property of their respective owners.
Deposit Photos
Featured Image Credit: Cylonphoto / iStock.
