Can you short Bitcoin?
Yes you can. But you must be aware exactly what it means when you short an asset such as Bitcoin. You must know the risks, the possible outcomes, potential losses and potential wins. You must weigh all these factors against each other and decide whether, or when, there is a good idea to short Bitcoin, or any other asset.
We will describe a few things for you in this article so you know what a short trade is, how you can make a short trade and what are the risks with a short trade.
What is a short trade?
A short trade is when you sell an asset you don´t own. If you don´t own the asset, you must borrow it to be able to sell it. Let’s take a basic example. Your friend Alice owns 10 physical coins that you borrow. While you borrow them another guy, Bob, offers you $1000 for each of the ten coins you just borrow.
You are pretty sure they will decline in value for any reason so you sell them to Bob. A week after this Alice asks you if she can have her coins back. Now, you need to buy them back and hopefully, the price is lower. If you can buy them back for $900 each you will end up earning $1000.
But let´s says you can´t find any price lower than $1500 for each coin. You end up paying $1500 for each coin and you lose $5000 in total. In the reality, the trading is a bit more complex than this basic example.
How to short Bitcoin?
Now that you know what a short trade is you might be interested in, how to short Bitcoin? Shorting Bitcoin is possible on all our trading platforms. It´s also possible to do with leverage.
Leverage works in both directions and reads more about leverage in the next section. A short trade is the same as selling the asset. So you are looking for instruments that are named “Short BTC” or “Sell BTC”.
What leverage to use?
If you have decided to short Bitcoin you must decide what leverage to use. The most common, and also recommended for all beginners is to avoid leverage at all. Leverage is usually written as “Short BTCx3” if the leverage is 3. Leverage 3 means that you are borrowing 3 Bitcoin instead of 1 in this example.
Let´s take a simple calculation example. Let´s say you short 1 BTC with position “Sell BTCx3” and the BTC price is $5000. First of all, you need $5000 to make this trade. Now your total exposure to Bitcoin is 3x$5000=$15000. So, let´s see what happens when the price of Bitcoin increase or decrease.
If the Bitcoin price increase you will lose money. If the price increase 10% to $5500 you will lose $1500 since you have exposure to 3 BTC. $1500 of your initial investment is 1500/5000=0.3=30%. Your loss, or profit, will be 3x the movement of the underlying asset as well.
Risks with shorting Bitcoin
There are, of course, risks associated with shorting Bitcoin. As with any investments, you must be aware of the risks and handle them to minimize them. The big risks to short Bitcoin, or any other asset, is that there is no limit.
When you buy an asset you can only lose what is in their for you because there is no asset that has a negative value. However, when you short Bitcoin, or any other asset, you kind of reverse the trade and the upside is always unlimited. For this reason, it´s much riskier to short Bitcoin than actually buy Bitcoin.
Who lends Bitcoin to be sold?
Short selling is only possible when there are Bitcoin holders who are willing to lend the Bitcoins they own. The reason a Bitcoin holder want to do this is that they can charge a fee for lending them. This will give the Bitcoin holder additional income on their investments. In addition, lending or short selling allows for a more liquid market.
Other Cryptocurrencies to short
Avatrade Crypto: Bitcoin, Ether, Ripple, Dash, Litecoin
Plus500 Crypto: Bitcoin, Bitcoin Cash, Ethereum, Monero, Litecoin, Ripple, Dash and NEM.
Etoro Crypto: Bitcoin, Ether, Ripple, Dash, Litecoin, Ether classic
InstaForex Crypto: Bitcoin, Litecoin, Ripple
SimpleFX Crypto: Bitcoin, Dash, Ethereum, Litecoin, BitcoinCash
Your capital is always at risk when trading