How to short Bitcoin on Bybit

How to Short Bitcoin on Bybit? – Short VS Long Perpetual Leverage

Bybit Shorting Bitcoin

  • Bybit is one of the best crypto derivative trading platforms and offers many different opportunities to short Bitcoin and other cryptocurrencies.
  • Short selling is an appreciated trading product by many traders since you can win in a bear market and hedge your positions in a bull market.
  • Still, there are risks with shortselling an asset and especially volatile assets like cryptocurrencies.

What is Short Selling a Crypto?

➤Short selling crypto occurs when an investor borrows a cryptocurrency and sells it on the open market, planning to repurchase it later for less money and give it back to the lender while making a profit.

One of the most famous short-selling stories is when Michael Burry shorted the American house market.

Long Bitcoin Bull VS Short Bitcoin Bear

Short Bitcoin red bear Market VS Long Bitcoin green Bull Market

Having a “long” cryptocurrency position means that you own the cryptocurrency and probably believe it will increase in value over the long term.

Bear market is another word for a downtrending market, and bull is another word for an uptrending market.

The opposite of a “long” position is a “short” position. A “short” position is generally a sale of a cryptocurrency you don’t own since you believe in a bear market to make a profit.

How do I short a stock on Bybit?

Sorry, you can’t short a stock on Bybit.

Short Bitcoin on ByBit Calculation Example

Bitcoin red bear market with calculation example

Here’s a short selling example applicable when you believe in a bear market:

Example: You want to short 1 Bitcoin at $60.000.

Step-by-step with calculations

  1. You borrow 1 Bitcoin from the Bybit market and sell it for $60.000. A few days after you borrowed the Bitcoin, the BTC’s price falls to $40,000.
  2. You buy a Bitcoin for $40,000 and return it to the lender (Bybit).
  3. Now you’ve made a profit of $20.000, minus any interest that you have to pay the broker for borrowing the Bitcoin.

How to Short Bitcoin on ByBit?

Here are steps you should take to start shorting Bitcoin on ByBit.

Step 1: Register an account on ByBit. It is pretty easy and takes about 5 minutes. It requires an email address and password. Be sure to implement 2FA with Google authentication. Bybit introduced mandatory KYC for trading and withdrawals during 2023.

Step 2Analyze the different shorting options on ByBit. In the screenshot from the ByBit trading screen, you can see what trading instruments are available for trading on ByBit.

Trade menu:

Derivative menu:

  • Inverse Perpetual
  • USDT Perpetual
  • USDC Contracts
  • Inverse Futures

ByBit offers two different derivative contracts, futures and perpetuals

futures contract is a derivative trading product. It’s an agreement to buy or sell the cryptocurrency at a predetermined price at a specified time. 

perpetual contract (Perpetual swaps) is a derivative product similar to a future contract. However, there are a few differences you must be aware of

1. Perpetual contracts are open-ended (There is no expiry as it is with Futures)

2. Perpetual contracts mimic a margin-based spot market and are traded close to the underlying reference. (Futures may trade at a significantly different price)

Step 3: Create a Short Order. Once you decide if you short Bitcoin with perpetual or futures, you can open up an order. At ByBit, the order input field is located on the right-hand side, as indicated in the screenshot below.

Here, you can make many different selections.

  1. Isolated or Cross margin
  2. Leverage level
  3. Open a new trade or close an existing trade
  4. Market order, limit order, or conditional order
  5. Order price and quantity
  6. Take profit or Stop Loss (TP/SL)
  7. Open Long or Open Short
Read more about these fields in our Bybit review.

What is a crypto short squeeze?

Bitcoin Green Bull Market Chart with an Alarm in the top for short squeeze

If the Bitcoin market moves against the shorting bet, you will have to buy back the Bitcoin when you can’t afford to repurchase it at a higher price.

A short crypto squeeze is triggered when a cryptocurrency increases in price rapidly. This will trigger a lot of margin calls and, in the worst case, liquidations.

If liquidations occur, this will trigger a further price increase and even more short-selling liquidations.

This is also a way for large institutions to manipulate the market. If you have money under management and discover a significant short position in a market, you can buy stocks in the open market to increase the price and force a short squeeze.

One of the most famous short squeezes was when the Reddit Wallstreetbets community found that large institutions shorted the Gamestop stock. The community agreed to short-squeeze these institutions by buying large amounts of the stock.

All in all, they were successful with the short squeeze. However, many small traders lost significant amounts of capital when the stock was called back in price since no one could withhold the high Gamestop price.

What is a Margin Call in Shorting?

A short sale requires a margin because the practice involves selling a borrowed and not owned cryptocurrency.

A margin is a form of collateral that has to be in the short seller’s account as a security to ensure that the trader has enough funds to cover the borrowed cryptocurrencies sold in the market.

The initial margin is the amount of margin required at the time the trade is initiated.

The maintenance margin is the margin requirement during the life of the short sale.

If the value of the short position falls below maintenance margin requirements, the short seller will face a margin call and be asked to close the position or increase/deposit funds into the margin account.

Risks with short-selling crypto

Exclamation sign for risks associated with shorting Bitcoin on Binance

Shorting Bitcoin, or any cryptocurrency, involves several risks and complexities that should be carefully considered:

  1. High Volatility: Bitcoin and other cryptocurrencies are known for their extreme price volatility. This makes predicting price movements challenging, and sharp, unexpected price increases can lead to significant losses when shorting.

  2. Liquidation Risk: If you are using leverage (borrowing funds to increase your short position), a relatively small price increase can lead to the liquidation of your position, resulting in the loss of your entire investment or more.

  3. Market Manipulation: Cryptocurrency markets are less regulated and more susceptible to manipulation and unexpected news which can lead to rapid and unpredictable price changes.

  4. Limited Historical Data: Bitcoin and cryptocurrencies are relatively new compared to other asset classes, offering less historical data to inform investment strategies.

  5. Regulatory Changes: The regulatory environment for cryptocurrencies is still evolving. Sudden changes in regulations can affect prices dramatically, posing a risk for short sellers.

  6. Counterparty Risk: When shorting through a specific platform or exchange, there’s the risk that the counterparty may fail to fulfill their obligations due to insolvency, hacking, or fraud.

  7. Interest Costs and Fees: If you are borrowing Bitcoin to short, you will incur interest costs and possibly other fees, which can add up over time and reduce potential profits.

  8. Potential for Infinite Losses: Unlike buying an asset where the maximum loss is the investment amount, shorting has a theoretically infinite loss potential, as the price of an asset can keep rising indefinitely.

  9. Psychological Stress: The stress and psychological impact of maintaining a short position, especially in a volatile market like Bitcoin, can be significant.

Given these risks, it’s advisable to only engage in shorting Bitcoin if you have a strong understanding of the market, a well-thought-out strategy, and a high tolerance for risk.

Can a short position be liquidated?

Yes, definitely. A short position requires an initial margin and maintenance margin. If the maintenance margin is not met, there will be forced liquidation. 

Short Selling Pros and Cons

Shorting Bitcoin and other cryptocurrencies can be a high-risk, high-reward strategy. It’s essential to weigh the pros and cons before engaging in such trades.

Pros:

  1. Profit from Market Downturns: Shorting allows traders to profit from declining prices, which can be particularly useful in bear markets or when a price correction is anticipated.

  2. Hedging: If you hold cryptocurrencies, shorting can serve as a hedge, helping to balance losses in your portfolio when the market declines.

  3. Leverage Opportunities: Many platforms allow for leveraged shorting, which means you can multiply your gains. However, this also increases risks.

  4. Market Efficiency: Short selling contributes to market efficiency by allowing negative information to be reflected in asset prices.

  5. Speculative Opportunities: For experienced traders, shorting offers additional speculative opportunities compared to just holding or buying assets.

  6. Diversification: Shorting can be part of a diversified trading strategy, allowing traders to take positions based on their market analysis.

Cons:

  1. High Volatility: Cryptocurrencies, including Bitcoin, are highly volatile, making it difficult to predict short-term price movements. This volatility can lead to rapid and substantial losses.

  2. Infinite Loss Potential: While buying a crypto asset has a maximum loss potential equal to the investment amount, shorting has theoretically unlimited loss potential, as prices can rise indefinitely.

  3. Liquidation Risk: Using leverage increases liquidation risk, where a minor price increase can lead to losing the entire position.

  4. Interest Costs and Fees: Shorting often involves borrowing assets and can incur interest costs and trading fees, reducing potential profits.

  5. Regulatory Risks: The regulatory environment for cryptocurrencies is uncertain, and changing regulations can impact prices unpredictably.

  6. Counterparty Risks: When shorting through exchanges or other platforms, there’s a risk associated with the counterparty’s ability to fulfill its obligations.

  7. Market Manipulation: Crypto markets are less mature and prone to manipulation, adversely affecting short positions.

  8. Psychological Stress: Maintaining a short position, especially in a volatile market, can be psychologically taxing and requires constant monitoring.

In summary, shorting Bitcoin and cryptocurrencies can offer unique opportunities for profit and portfolio management but comes with significant risks, mainly due to market volatility and the complex nature of these assets. It’s typically recommended for more experienced traders who understand and can manage these risks.

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