Many investors can capitalize on the drop of the bitcoin price through short selling, meaning trading against BTC. How to short sell (commonly just referred to as “short”) Bitcoin let’s discuss in a nutshell how this process works.
or some bitcoin might be viewed as an asset, since is still a lack of ways to actually use it as a currency. Any investor keen on cryptocurrency is aware that the bitcoin price can be volatile.
Less than a month ago the bitcoin price was seeing lows before a revitalization at the end of October. However, many investors can capitalize on the drop of the bitcoin price through short selling.
Short selling is an investment method that allows you to benefit when the price of a specific asset (you are investing in) drops. Below we will give you a quick rundown on what it is and how-to short sell Bitcoins.
Before we discuss how to short sell (commonly just referred to as “short”) Bitcoin let’s discuss in a nutshell how this process works.
Essentially when shorting, you would be allowed to borrow an asset and sell it at its current value. Eventually, you would pay the lender back with the exact amount of the asset you borrowed. Ideally, the profit is obtained when the price of that asset you must buy back and return to the lender, is lower than what you initially paid.
Think of it a little more clearly by viewing the flow chart below:
You short sell or “borrow” 5 Bitcoins and at the time they are worth $100 USD/BTC
You then sell the 5 BTC and make $500
The bitcoin price falls to $50 USD/BTC
You repurchase the 5 BTC you owe your lender at the new price for a total of $250.
Your profit from this venture is $500 (from initial sale) - $250 (from buy back) = $250.
Now that you understand that, let’s get to how exactly you can start earning from this process. There are numerous ways to get started, but we will start with a few below:
Futures are basically like contracts that obligate an investor to buy or sell an asset at a predetermined or “fixed” price and date in the future. Essentially it is a gamble that when you must buy the Bitcoins, they cost less than what you sold them for.
It is worth noting that bitcoin futures are relatively new and there was no method before December 2017 to bet on the fall of the bitcoin price. The Federal Reserve of San Francisco even published a report that suggested that the introduction of these futures markets had an impact in the post December 2017 bitcoin price drop.
If you are interested in going with the futures method, please make sure you understand all the risk involve.
Contract for Difference or CFD means that you don’t go through the process of borrowing and buying back any of the Bitcoins and instead you will just pay the difference, hence the name. It is very similar to the futures market, but much simplified for the investor.
A few sites are offering this service and tutorials on how exactly to get this started. Although we must note not all CFDs are available in every country. Also make sure that you are working with a reliable trading company, as many of them tend to still work on shady structures.
CFDs are higher risk as you are letting a 3rd party hold your funds, while they provide you with the future contract/leverage - so please be aware.
This option is for the analytical and financial savvy. This method is also not exactly the same as shorting, but this is more like identifying the best time to sell when you decide that the price of BTC will no longer rise and then buy again when the bitcoin price reaches a low.
This is a lower risk then CFDs, you may have bought BTC for a price of say $1000 USD/BTC and then perhaps the price has risen to $2500, you would still get the $1,500 price gain by selling, but you do have to accept you may miss out on more profit should the price continue to rise.
We would only recommend this for those willing to buy BTC and willing to study and monitor the market. (Simply put, buy low - sell high).
For the advanced investors you could also buy bitcoin put options as a way to bet on the future price of bitcoin. Put options are similar to futures, but there is a key difference. You have the right, but not the obligation (contrary to futures) to purchase an asset at a predefined or fixed price on a specific date. Call options are the opposite and allow you the right, but not obligation to buy.
Let’s say you are unsure of the future price of bitcoin for Spring 2019, you can purchase a three-month put option on a site such as, LedgerX with a strike price (the price at which a put or call option can be exercise) of $2,000. You make a profit if the bitcoin price falls and trades below that number. However, in the event it remains higher, you just lose the fee you paid for the put option.
This may be a little complex, but it is a very low risk, and low price “option” for anyone looking to profit from a price drop.
This is an investment and with any investment there are risks involve, but with shorting, there are hidden risks that many do not see right away.
One key risk we will highlight is the loss potential can be drastically higher than buying stocks for example.
Most of us know that buying stocks is risky, we invest $2,000 into a company and they fail, we lose our $2,000 dollar investment, simple, it can’t get worse.
Now let’s say you short sell the original 5 BTC we used in our flowchart for $100 each, great you made your $500. However, a few weeks later the bitcoin price is now $2,000 and those 5 BTC you have to pay back will cost you $10,000 and net you a -$9,500 loss!
So, insure you always do your research on the price of bitcoin and diversify your investments. You can play the long game with currency in exchanges and the short game with CFDs or futures to minimize risk and still potentially make healthy returns. Remember to make your own money and risk management plan. Then make sure to follow it.
Staying up to date by reading the latest bitcoin and cryptocurrency news is a key to your education and awareness.
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