How to short Bitcoin (BTC)

How to short Bitcoin (BTC)
November 1, 2021 0 Comments

How to Short Bitcoin (BTC)

The cryptocurrency market has high volatility since the BTC to the USD exchange rate, and the value of altcoins can change many times during the day. Like traders on traditional financial exchanges, crypto traders use different behaviors. One of the most popular is the purchase of coins at the moment their value falls, after which the rate should move up, allowing you to make money on it. This strategy is called “shorting.”

What Does it Mean to Short BTC and Other Cryptocurrencies

The main BTC shorting tools are derivative contracts. A derivative (derivative) contract is a special type of contract, the value of which is determined and depends on the underlying (derivative) instruments. Buying such a derivative does not mean taking possession of BTC. It only means that your state depends on the price of BTC (asset). The use of such derivatives makes it possible to more actively apply sophisticated and complex strategies than during the direct purchase of assets. In cryptocurrencies, a contract is most often sold that tracks the ratio of BTC price to USD. Traders have the opportunity to borrow the so-called leverage from the exchange. Leveraging helps to increase profits, but risks also increase.

Opening short positions with leverage is a rather difficult and risky manipulation, especially for altcoins, which have high volatility and low liquidity. To open short positions, you should be familiar with the basics of technical and fundamental analysis, know the specifics of the market and the psychology of its participants. In practice, not every trader who knows how to make money on long positions will be able to profit from a fall in the market.

Algorithm and Nuances of Shorting BTC and Other Cryptocurrencies

First of all, to start shorting, a trader needs to choose cryptocurrencies, the value of which should decrease in the future. Next, you need to determine the moment of entering the market, take out a loan and place an order. The success of the operation and its profitability depend on the correctness of the decisions made.

Those wishing to play on stocks or cryptocurrencies with the hope of a decrease in value must necessarily take into account several nuances:

  1. Market growth is always gradual, but shorting is always implemented quickly. To get the most out of a short, a trader must learn to choose the right entry points.
  2. Shorting allows you to earn a lot and quickly, but the wrong actions may not bring results or lead to negative results.
  3. The profit largely depends on the size of the initial deposit. The larger the initial size of the deposit and the leverage that the exchange offers, the greater the amount of profit you can fix.

The algorithm of a trader’s actions to open a short position is identical for all trading floors:

  1. You should choose an exchange, study its commissions for deposit and withdrawal of funds, the rules for providing leverage and trading. Not all exchanges allow leveraged trading.
  2. You must register on the exchange and deposit money into an exchange account. Sometimes, a trader must verify an account to gain access to shorts and trading.
  3. It is necessary to analyze the market and determine the downward trends.
  4. Then you need to go to the margin trading section and select the cryptocurrency on loan and its volume.
  5. After the loan is issued, a sell order is placed. We need to wait until it closes.
  6. Next, you will need to wait until the market meets expectations and buy the asset back at a reduced cost.
  7. The debt is returned to the exchange, and the difference from the transactions remains on the exchange account on the personal balance.

As a rule, the leverage is provided by the trading platform at a small percentage. This percentage must be taken into account when planning deals, as it can neutralize profits or lead to negative results. It’s worth noting that you won’t pay the brokerage fee for leveraging on most marketplaces if you can complete the entire shorting process in one day.

Best Exchanges for Short BTC and Other Cryptocurrencies

Many cryptocurrency exchanges have implemented a margin trading system with different leverage sizes. Margin trading rules are established by the administration of the trading platform. Each exchange allows shorting specific cryptocurrencies and sets the leverage at its discretion.

BitMEX is the most popular cryptocurrency exchange that only specializes in derivatives. The peculiarity of BitMEX is that it only deals with BTC.

BitMEX’s flagship derivative is an XBTUSD perpetual swap that never expires and continually tracks the price of BTC against the US dollar.

BitMEX traders can use up to 100x leverage, which means that owning 1 BTC will allow a trader to open a position worth 100 BTC. However, if the BTC rate changes by less than 1% in the wrong direction, then the position will be liquidated.

Deribit is the closest competitor to BitMEX, which also only works with BTC.

List of cryptocurrencies exchanges with the best conditions for margin and shorts:

  • Binance;
  • Bitfinex;
  • Bitmex;
  • Kraken;
  • Huobi;
  • Ledgerx, etc.

Risks with Short

The risks of a market participant in a short position are much higher. The reason for the risks is that when the price drops by half, you can easily make money, but doubling the price is a loss of investment in the amount of 100%.

When playing for a fall, there are two main nuances to consider:

  1. Cryptocurrency markets are in constant flux. A huge number of factors affect the value of assets. Some factors are not easy to predict and make it difficult to predict the future value of an asset. An error can be equal to the loss of the entire deposit, and even experienced traders are not insured against this.
  2. The cryptocurrency market has its limitations. The trading terminals of each exchange contain different trading pairs for margin trading. The trader has to choose from the available ones.

Short trades must be calculated in advance, taking into account the trading and margin commissions. If you do not do this, the trader runs the risk of getting a negative result even with a successful forecast.

The use of several simple rules in trading helps to secure your capital partially:

  1. Diversify your losses and take into account possible deposit drawdowns.
  2. Never risk more than 10% of your total deposit on one trade.
  3. Take all available measures to secure your stock account.
  4. Avoid assets with low liquidity.

Shorting Benefits

Selling short is beneficial not only for short birds but also for the market as a whole for the following reasons:

  1. Short positioning is the fastest way to make a profit. Many people know the saying that the market goes up the stairs and goes down by the elevator. Taking profit in a falling market can be much faster because fear is stronger than hope.
  2. Protects profits and expands opportunities. The only reason not to short is to invest for the long term. In all other cases, opening short positions and combining them with longs allows you to make money in both a falling and a growing market.
  3. Guarantee of impartiality. In trading, you should look for opportunities in both directions. If you only trade in a growing market, you will inevitably face frustration.
  4. The honesty of prices. Shorting is very important to the market and helps to maintain fair prices. It is an important aspect of reaching a consensus on asset prices, and without it, the market is not fair. When the cryptocurrency or stock market undergoes selloffs in short positions, it means that the assets are weak and are not trusted by traders and investors. Market participants who are bullish help set an adequate price for assets and allow investors and traders to resist self-deception.

Opening short positions can bring quite high returns, even against the background of a general market decline. Market participants should be able to make money under any circumstances and trends, and for this, they need to be able to play both up and down.