As the old saying goes, “what goes up must come down.” Now, you can apply this to many things, but there are some definitive truths to this philosophy in the world of finance. This is an unpredictable concept that puts many people on edge, especially when it concerns their investments. Even when a stock manages to achieve an impressive high, there is always that nagging worry that it could potentially fall. With cryptocurrencies, traders come to expect price drops. Because of the inherent volatility, it’s important as a trader to know how to short Bitcoin and other cryptos.
In April of last year, Bitcoin was successful in breaking through the significant $5,000 mark. It managed to skyrocket and garner over 14% in price over 24 hours. Though the duration was only a few hours, it was enough to leave an impact. However, even with this milestone, many traders were on high alert for a backwards slide. With this comes an interest in ‘shorting’ bitcoin in case you want to place a bet on an impending price decline.
The most exhilarating and lucrative times to involve yourself in Bitcoin trading are, inarguably, during high volatility. The reason for this is because large price ranges are quite common during these specific periods. There is a lot of focus pertaining to retail Bitcoin traders that concentrates on ‘buying low, selling high’ and ‘HODLing’. Though, it’s easy to miss the opportunities to successfully profit as much – if not more – during large downwards trends. Likewise, during bear markets.
This article will dive into what the concept of ‘shorting’ is and how you can use it with your bitcoin. It will also highlight some of the most effective strategies that you can use and what platforms allow bitcoin shorting.
What does ‘shorting’ mean?
The term ‘shorting’ is a popular one in financial trading. It is indicative of the process of opening a position that gradually becomes profitable as the price of the underlying asset decreases. The total profitability of the trade typically ends up being proportionate to the overall size of the price reduction.
In comparison to opening a ‘short’ position, the idea of opening a ‘long’ position is actually a straightforward one. Whenever a trader is expecting the price of an asset to increase, they then purchase some of the assets. Afterward, they sell it profitably when the current price surpasses the original price of the purchase.
Opening a short position (aka. shorting) contains a bit more complexity in its process. When a trader is expecting a decrease in the price of an asset, they short it. They do so by borrowing a certain amount of the asset before immediately selling it. As soon as the price of the asset experiences a drop, only then can they lucratively close the trade. To do this, they buy the same amount of the asset that they are borrowing, except for less than the original value. Then, they return it to the party that was loaning it to them in the first place. They keep the difference strictly between the asset’s original value and the lower value that they are repurchasing.
Why people do it
Short sellers engage in these transactions because they have a specific belief. They are under the assumption a stock’s price is heading in a downward direction. What’s more, if they sell the stock today, then they will be able to buy it back at a lower price later in the future. Should they be able to accomplish this, then they will make a profit. Specifically, one that largely consists of the difference between their sell and buy prices.
There are some traders that partake in short selling primarily out of speculation. There are plenty who wish to hedge – or protect – their downside risk should they possess a long position. Put simply, if they are already in the ownership of shares of the same or a related stock outright.
The general profitability of short selling could possibly increase with the use of an array of other mechanisms. One of these mechanisms includes leveraging. With them, they could acquire returns from various successful trades. These trades are those that are several times higher than what they are without leverage.
To better explain this, let’s assume that the opening of a short position is with a value of $500. Moreover, after being leveraged at 50x, it would end up being comparable to opening a $25,000 position ordinarily. The profit that comes from closing out this trade will wind up being significantly higher than the same non-leveraged trade.
1 – 2nd-day continuation short
Something interesting occurs in the middle of a bear market concerning downwards Bitcoin price actions. Oftentimes, during a single day, they will see that momentum resulting in further downward price movements continuing the following day. 2nd-day continuation shorts are ideal within the enclosures of an extensive scalping or day trading strategy. Moreover, they heavily rely on the detection of high-ranged downwards price actions. There is also a dependency on the willingness to open a short position for the next day.
If one wants to properly execute this strategy, traders need to monitor the price of bitcoin. Furthermore, they should have alerts in place that effectively mark humongous downwards breaks. This may be indicative of the following trading day potentially seeing a continuation of downwards momentum. On top of that, with a conceivably strong entry point for short selling bitcoin being on the first day’s conclusion. Really though, it all depends on various parameters.
2 – Trade on the failure of patterns
A pattern failure is when a trading pattern undergoes conventional formation, but what ultimately happens deviates from the norm. Rather than the pattern experiencing a completion or continuation, it instead fails. It unexpectedly breaks apart to either the upside or downside.
There are a lot of traders who are all watching the same formation fail at the same time. Therefore, they all have one common expectation. If the pattern concludes with a typical upwards breakout, the opposite would then be true during a pattern failure. As traders start to sell after the pattern failure, more and more are interpreting this as confirmation of the same. Moreover, this brings forth an array of clear opportunities to effectively short sell.
In order to execute this strategy, there is a requirement for traders to monitor Bitcoin. This is primarily for the initialization of patterns that usually concludes with an upside breakout. These kinds of patterns include ones like Ascending Triangles and Inverse Head and Shoulders. Should the pattern fail at any point, this could be a signal of a lucrative entry point for short selling bitcoin.
3 – Trading the decline of parabolic trends
In terms of cryptocurrency, this strategy revolves primarily around looking for ‘pumps’. In other words, seeking out fast, short-term spikes in price and volume simultaneously. Pumps are actually quite common within crypto markets. This is mostly because of a slanted ratio that lies between the liquidity available and the buying power of ‘whales’. This means that they are able to start very easily and continue pumps profitably.
One can easily describe parabolic trades as being the stock, forex, and commodities equivalent of pumps. They are essentially the same thing; the only difference is the formal name.
The proper way to lucratively carry out this strategy is by remaining conscious of any pumps in the price of Bitcoin. In fact, not just Bitcoin, but all other cryptocurrencies as well. The asset may become overbought and those with long positions will close them out at an expanding rate. When this occurs, they will short the crypto-asset, ideally as close to the pump’s top as possible.
This particular strategy relies heavily on the fact that it is not conceivable for any asset to go up forever. Usually, after the pump is complete, there is suddenly a rapid decline in price back towards the regular trend.
4 – Shorting bitcoin futures on CME and/or CBOE
Probably the simplest method for institutional investors looking to short bitcoin is to sell bitcoin futures. The two best platforms to do this with are the CME Group and CBOE (Chicago Board Options Exchange). ‘Futures’ are defined as being standardized exchange-traded financial derivatives. They offer risk mitigation and hedging possibilities to those who use them. Futures are special because they obligate an investor to either buy or sell an underlying asset in the future. Specifically, at a predefined price and date. Such assets of this kind include a stock index, a commodity, and a currency.
Basically, futures contracts facilitate investors in betting on the price increase – or decline – of an asset. Moreover, they can do so without needing to actually own it. For example, Bitcoin futures contracts on both the CME Group and CBOE are cash for delivery. This essentially means that as soon as the contract matures or closes out, no “physical” bitcoins exchange hands. In lieu of this, it is only possible to exchange the profit or loss of the trade-in U.S. dollars.
Platforms that permit shorting bitcoin
Below is a list of platforms that allow the practice of bitcoin shorting.
1 – PrimeXBT
PrimeXBT is the leading cryptocurrency margin trading platform in the world. Throughout 2019, it would experience an extraordinary growth of both users and trade volume. All the while, it was simultaneously incorporating dozens of different complex features. The platform supplies users with the ability to short the top crypto-assets. These assets include, but are not limited to, the following:
Along with these four cryptocurrencies, there is also margin trading with leveraging of up to 100x.
It is easy to associate the exceptional growth of PrimeXBT’s to one specific element. That being the listing of crypto-asset pairs and traditional financial assets that exist within the same platform.
- Crypto-asset pairs include BTC/USD and LTC/BTC
- Commodities include Natural Gas, Crude Oil, and Gold
- Forex pairs include EUR/USD, GBP/CHF, and AUD/JPY
- Leading global stock indices include the NASDAQ, SP500, and HK-HSI
The platform also provides leveraging on traditional financial assets. The ratios are up to 1000x on forex trading, 500x on commodities, and 100x on stock indices. With these numbers, it effectively puts PrimeXBT as one of the best exchanges to short bitcoin on.
2 – BitMEX
BitMEX has been a quality Bitcoin exchange for years and it provides its users with Bitcoin shorting. However, recent events signify that users should exercise caution and vigilance when you consider conducting their trading here. BitMEX offers bitcoin shorting along with the ability to generate high leverages on each trade. For many years, this has been among the better trading platforms to utilize when it comes to Bitcoin margin trading.
Sometime last year, there was news about BiMEX possibly being under investigation by the U.S. Commodities Futures Trading Commission (CFTC) for potential crimes. These alleged crimes include disregarding U.S. regulations that prevent U.S citizens from using the platform. Moreover, there was apparently some evidence pertaining to Bitmex actively trading against its clientele. This influx of accusations would result in a mass exodus from the platform. What’s more, there was an increasing decay of trading conditions.
Whatever happens, hopefully, there will be a comparatively better understanding of the situation at BitMEX. It all depends on what the CTFC investigation digs up and what the public reporting on the CFTC findings will be.
3 – eToro
eToro is a popular social trading platform and multi-asset brokerage company that concentrates on providing financial and copy trading services. It lists a wide range of different assets and financial instruments, one of which includes cryptocurrencies. Unlike other platforms on this list, eToro is more of a traditional trading platform. That is to say, it’s a conventional platform that just so happens to have cryptocurrencies. This addition came about after the platform saw its potential.
As a part of what eToro offers users, Bitcoin Contracts for Difference (CFDs) are a feature that is available. These are instruments that permit traders to create a contract with a broker. This is in lieu of being able to possess any bitcoin itself.
Upon the contract’s completion, the broker and the trader will then replicate market conditions. They will then settle the contract and they will do so with either party coming out on top. It mainly depends on price actions throughout the duration of the contract. Therefore, it is possible to imitate bitcoin shorting by using Bitcoin CFDs. This is where a contract will pay positive returns to the trader should the price of bitcoin end up dropping.
4 – CME Group
CME Group is a company that we briefly mentioned earlier. A Bitcoin derivatives exchange that offers futures and options on a wide variety of traditional assets. Bitcoin futures were part of the platform’s listings at the end of the year 2017. What’s more, it was one of the first mainstream financial platforms to ever do this.
Bitcoin futures are contracts that help determine both a date and price for the sale of a certain amount of bitcoin. Moreover, it is legally binding between both participating parties. Futures are a notable alternative to purchasing bitcoin for those who would rather speculate its future movements in price.
Similar to Bitcoin CFDs, it is easy to emulate bitcoin shorting. This is possible by constructing a futures contract for a lower price than the current price of bitcoin. Then, you set it for a future date.