Investing in bitcoins can be risky because the asset is extremely volatile and features unpredictable price swings. Besides, it is characterized by large price movements. So if you suspect that there is a likelihood of a very large price fall, you can short sell the asset and make a gain. Fortunately, the methods a trader can short sell bitcoin are increasing.
Short selling bitcoin refers to selling the asset when the price is high because you anticipate that it will fall. You may short sell bitcoin through bitcoin exchanges or leveraged trading providers. Similarly, you can short sell the asset through bitcoin options and futures.
When you short sell bitcoin, you take advantage of the volatile nature of the asset. A trader short sells the asset when the price is high but suspects that there are enough forces to make the price fall. In this article, you will learn about several ways how you can short crypto.
Short selling through Bitcoin exchanges
This is the commonest method trader’s use to short sell bitcoin. They do this through market exchanges that accept shorting cryptos. Of course, such exchanges are complex but allow traders to open short positions whenever they want. The traders must borrow the asset from a willing lender or a broker and sell it immediately.
Platforms such as PrimeXBT allow traders to buy back the asset you borrowed at reduced prices. But they will need to return the shares they borrowed while retaining the price difference. Note that short-selling comes with risks. For instance, if the prices increase instead of falling after you borrow bitcoins, you will be forced to buy back the borrowed bitcoins at higher prices. This exposes you to losses.
Leveraged Trading Providers
These providers offer products like spread betting and contract for difference (CFDs). So they allow you to take a position on whether the price of bitcoin will fall or rise. If you are correct, you gain. If you are wrong, you incur a loss. Note that CFD and spread betting are leveraged tradings. You only need to part with a small deposit to access the full trade value. But it is the full trade value that counts. It amplifies the ultimate gain or losses a trader can make.
Bitcoin Options
Some exchanges offer bitcoin options. These are contracts that allow a trader to buy and sell bitcoins in the future but within a specified date range. It is an advanced method of short selling that uses leveraging, so it should only be used by experienced traders. However, it is a flexible way of short-selling bitcoin since you only risk the contract premium.
Bitcoin Futures
They are contracts that allow traders to buy and sell bitcoin for a specified amount of money at a specified date. When you take this contract, you commit to buying or selling a specified quantity of bitcoin at a stated amount on the specified date.
The future contracts protect traders from price fluctuations. And again, the contracts are complex and should only be reserved for experienced traders.
Things To Watch Out When Short Selling Bitcoins
Price fall-since the price of bitcoin cannot crumble below certain levels, there is always a cap on the gains you can make. But the losses you can make are uncapped since the price can grow exponentially. Therefore, you must mitigate the risks using appropriate stop-loss tools.
Volatility- as the asset price fluctuates, you may gain just as much as you can incur losses. Therefore, avoid trading when there is no good reason for the market to be volatile. Also, create a trading plan and follow it.
Final Thoughts
Short selling bitcoin is complex, and so it requires that you educate yourself on how best to short sell. You also need to gain more knowledge on bitcoin markets and leveraged trading. If you don’t gather information in these areas, you may make costly mistakes. Also, although you can short bitcoins at any time, it is better to use both fundamental and technical analysis before short selling the asset.