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How to Short Bitcoin? | BTC Trading Guide | Step-by-Step

Justinas
Baltrusaitis
2 months ago
16 mins read

In this guide, we will discuss how to benefit from a falling cryptocurrency market by shorting Bitcoin. Specifically, the guide will show you how to short Bitcoin, why you would consider doing it, ways of shorting crypto, and some of the inherent risks you should pay attention to. In addition, there is a detailed step-by-step guide to shorting Bitcoin on the Binance exchange.

About shorting Bitcoin

Short selling, or simply ‘shorting,’ is an investment strategy in which a speculator aims to benefit from a fall in an asset’s price. Essentially, if a trader believes that an asset’s price will fall in the future, they can take short positions by borrowing that asset from a broker, selling it at the current price, and buying it back at a later time when the price has fallen. The trader would thus make a profit from the price difference.

Shorting is a common investment practice in traditional markets that have been adopted over to the nascent cryptocurrency space allowing crypto traders to bet on falling prices. Bitcoin (BTC), the most popular digital asset, is also the most heavily shorted crypto.

Later, in this guide, we will highlight some of the various ways in which a trader can participate in shorting Bitcoin, but let’s start from the beginning.

How does shorting Bitcoin works?

The principle of shorting Bitcoin or any other tradable asset is straightforward. A trader needs to sell an asset they hold, to buy it back at a lower price. Now, if the asset that you sell is yours, you are not particularly making any money when you buy it back later.

However, if that asset is borrowed at a higher price and returned at a lower price, you get to keep the difference, which would be considered a profit.

There are several brokerage platforms that lend Bitcoin to speculators who wish to short the asset or some which facilitate peer-to-peer lending and borrowing. Others simply deal in derivatives, thereby circumventing the need for their customers to trade in the actual underlying assets.

As we will explain in later sections, there are several ways to short Bitcoin, depending on your risk profile and knowledge of the marketplace. These include margin trading, CFDs (contracts for difference), options, futures trading, and investing in inverse leverage tokens.


Crypto beginners’ corner:


Why traders short-sell Bitcoin

There are several reasons to short Bitcoin, which stem from the multiple goals held by various investors. However, these reasons can be easily grouped broadly into these categories:

  • Hedging risks – most long-term investors (also referred to as hodlers) may be unwilling or are unable to liquidate their long positions. As a result, if they anticipate an incoming Bitcoin bear market, they could take up short positions whose profits will be used to offset the losses in their long-term positions;
  • Maximize earning potential – Bitcoin, like its traditional assets counterparts, goes through the normal bull and bear cycles where its price rises and falls religiously. A prudent speculator will look to benefit in both bull and bear markets rather than only one of them. This way, they can increase their chances of making a profit;
  • Bitcoin skepticism – skeptical investors or naysayers who do not subscribe to the blockchain revolution message. Such individuals believe that Bitcoin is nothing but a passing fad and may therefore seek to benefit from the asset’s (supposed) eventual fall. They could even try to manipulate public perception of cryptocurrencies through the media by spreading FUD (fear, uncertainty, and doubt). In the past, they have been successful in knocking the Bitcoin price down, but not out.

Ways to go ‘short’ on Bitcoin

Now that you understand how and why you would want to short sell Bitcoin in the market, here are some of the common ways traders position themselves to benefit from a falling Bitcoin price.

  1. Spot Margin trading;
  2. Options trading;
  3. Futures derivatives trading;
  4. Inverse leveraged crypto tokens trading.

This is by no means an exhaustive list. You can find more but less common strategies to short crypto with a little bit of research. Let’s delve a little deeper into these four to understand what each method entails.

1. Spot margin trading

Spot margin trading is a service offered by an increasing number of cryptocurrency trading platforms. It involves buying and selling digital assets using leverage offered by these brokers with instant settlement (i.e., on the spot).

A trader using margin trading to short BTC will typically borrow the assets from their broker, sell and buy them back at a later date when their value has (expectedly) fallen. They will thus make a profit by pocketing the difference between the sell and buy price of the borrowed coins.

Margin trading is the simplest way to short Bitcoin. It represents the most straightforward implementation of the short-selling concept compared to the other methods available.

You can access spot margin trading in any of the following trustworthy and credible crypto trading platforms:

2. Crypto options trading

Options are non-obligatory contracts between transacting parties allowing for settlement within a specified date range on a predetermined price (also called the strike price.) Two sets of options exist from which an investor can choose depending on their trading strategies:

  • Call options – this contract gives you the right to buy Bitcoin at the strike price, and they typically gain in value as the price of Bitcoin rises. These options are used in bull market conditions;
  • Put options – on the other hand, the put option gives the holder the right to sell Bitcoin at the strike price, which is ideally lower than the current. The value of this contract rises as the price of BTC falls and is ideally the appropriate contract to buy if you are looking to short Bitcoin.

Note: They are called ‘options’ because the contract holder is not obligated to settle the contract at or before the strike price.

Leading crypto exchange platforms that offer Bitcoin options trading include:

3. Crypto futures trading

The Bitcoin futures market allows counterparties to get into settlement contracts in which either party will buy or sell the asset at a predetermined date and for a specific price. The parties have an obligation to settle the contract according to the terms agreed upon.

A trader looking to short Bitcoin will ideally take the sell side of the futures contract and agree to sell BTC to the buyer at a certain price. If they anticipate the price of Bitcoin to fall below that set level, they will buy the asset at the market on the settlement date and time and sell it at a higher price. If they are wrong, they will be forced to buy BTC at the market price, which is higher than the settlement price, theory making a loss.

On the flip side, the trader could also opt to take the buyer role in the contract if they believe the price of BTC will rise above the settlement price. If that’s the case, they will be obligated to buy the asset at a discount, but if they are wrong, they will do the same at a premium.

The following major crypto trading platforms will allow you to trade Bitcoin Futures:

4. Inverse Bitcoin Exchange-Traded Products (ETP)

As the name suggests, inverse Bitcoin ETPs are specialized instruments that track the price of BTC with a twist. As the value of the underlying asset rises or falls, that of the inverse ETP will move in the opposite direction. Therefore if the value of Bitcoin is falling, the Bitcoin inverse ETPs will rise.

Here’s an illustration of the 21Shares Bitcoin inverse ETP in action:

Source: 21Shares SBTC product page

SBTC is a product offered by Swiss Fintech company 21Shares AG and traded on multiple European exchanges, among them being:

Risks associated with shorting Bitcoin

Important: Short-selling Bitcoin is a risky venture and should only be attempted by experienced traders. It is not recommended to start your trading journey by shorting BTC. Rather, if you wish to participate in speculative activities within the cryptocurrency scene, you could start by trading spot markets without leverage and avoid the derivatives markets until you have gained some experience.

The main risk involved in shorting Bitcoin is unlimited losses. Unlike the normal (long position) trade, where a trader’s losses are capped at the zero level, losses from short positions can technically balloon infinitely. This is because the price of an asset (in this case, Bitcoin) can keep rising and never return back to break-even levels.

On the flip side, the gains are capped since the price of Bitcoin cannot go below zero. Therefore, shorting BTC has limited gains but unlimited losses.

How to short-sell Bitcoin through Margin Trading (Step-by-Step)

As demonstrated above, there are multiple ways to short Bitcoin. In this section, we will highlight the simplest of these methods and that is margin trading. We encourage you to research extensively and learn about all the available avenues before settling on whichever method you may find congruent with your trading strategy.

The platform of choice for this tutorial is Binance.com, which is the leading cryptocurrency trading platform by daily trading volume. Other reasons why the exchange is ideal for trading crypto include:

  • It is highly trustworthy;
  • The platform has insured its users’ assets;
  • Users can access the exchange globally in a majority of the countries;
  • Binance supports the widest selection of cryptocurrency trading pairs/markets;
  • It also offers a relatively wide variety of crypto-based investment products, including those needed to short Bitcoin, such as futures, options, and leveraged trading.

What we like:

Highly credible broker

Perfect for beginners

Protected by insurance

80+ cryptocurrencies to invest

To follow along with this guide, first, create a Binance account and verify your identity. You can check out our comprehensive Binance review for further details about the exchange and how to create an account with the service.

Also, remember to fund your account once you have successfully set it up.

Step 1 – Access your Binance account.

Visit Binance.com and log in to your account. Click on the [Log In] button on the top right side of the main navigation bar.

Provide your login credentials to access your account.

Note: If you haven’t done so, ensure that you enable two-factor authentication (2FA) for added security while trading online.

Step 2 – Visit the Margin trading section.

Hover the mouse cursor over the [Trade] tab on the top navigation panel, then select [Margin] from the drop-down menu that appears.

For futures and options contracts, you can access the next tab labeled [Derivatives]. However, we will not be delving into the other BTC shorting methods in this tutorial.

You will notice that the margin trading interface is ‘busy,’ which could be intimidating for a beginner. To simplify the process, we have highlighted the three most important sections:

  • The trading pair symbols (top-left);
  • The trading chart interface (center);
  • Trading pair selection panel (right side).

When you visit the margin trading page, the BTC/USDT (Bitcoin / USD Tether) trading pair will be selected by default. However, if this is not the case, use the selection panel to search for the right BTC pair. 

You can choose any pair to short Bitcoin, but the simplest trading setup will involve choosing a stablecoin against BTC. USDT is currently the most popular and largest stablecoin by market valuation.

Next, use the middle panel to analyze the BTC price action and come up with a trading setup, i.e., the price at which to buy and when to sell. You also want to select a price at which to exit the trade in the event that your trade starts showing a loss.

Step 3 – Transfer funds.

Assuming that you have funded your Binance account and your funds are held within the Fiat and Spot wallet, this will be the time to transfer them over to your margin account. However, before that, you need to choose which margin wallet you will use to trade. The options are:

  • Cross margin – funds in this wallet will be shared amongst all margin positions, i.e., the risk is shared across all open positions opened through this wallet;
  • Isolated margin – as the name suggests, the risk is isolated to a particular trading pair. We recommend using this wallet whenever possible but whichever one you choose will be better informed by consulting your trading strategy and risk management approach.

In this tutorial, we will use the isolated margin wallet, so scroll down to the trading panel, which is located below the charting window.

Choose the [Isolated] tab within this panel to select the isolated margin wallet. You’ll notice that Binance offers up to 10 times leverage for isolated trade positions as opposed to the cross margin positions, which only qualify for three times leverage.

As mentioned earlier, a short position will involve you borrowing Bitcoin from the broker to sell therefore, we will use the [Selling] panel to borrow and set up the trade.

Click on the [Transfer] button as shown in the image above to load the transfer wizard window.

In this example, we are moving funds from the Fiat and Spot wallet to the BTC/USDT Isolated margin wallet. Ensure that the [Fiat and Spot] as well as the [Isolated Margin] wallet options are selected within the [From] and [To] form fields, respectively.

Below that, in the [Coin] field, you will be required to select between the two assets that make the trading pair. You will not be able to transfer any other asset that is not part of the pair. Once you select the asset to transfer, provide the amount, then[Confirm] the transfer.

Note: Internal transfers between wallets are free on Binance, meaning moving your funds will not cost you anything.

Step 4 – Set up the trade.

Once the funds are in your Isolated Margin wallet, it is time to make the trade. You want to borrow BTC from Binance to sell, and this process can be done in two ways: (1) manually borrow the funds and sell them, or (2) automatically borrow the funds while executing the sell order.

The latter ensures that you get to borrow the BTC at the exact time that you are opening the position. Borrowing funds in advance before you make the trade could increase the interest you pay on your loan, given that Binance charges an hourly rate on borrowed funds.

To execute your order automatically, select the [Borrow] tab within the ‘Sell’ panel. You will notice that now Binance indicates that we already have an available balance of ~$100 in BTC even though we transferred $10. This figure takes into account the amount of BTC that we are able to borrow – which is ten times what we have as margin.

You can choose to borrow all of the available funds and max out your leverage, however, there is the option to borrow less to minimize your risk exposure. In our case, as shown above, we have opted to borrow half of the available funds giving us a 5x leverage.

Binance will indicate the amount of BTC that you are borrowing to open the trade and if you are comfortable with the terms, click the [Margin Sell BTC] button to initiate the transaction. Confirm the trade in the pop-up window.

You have successfully opened a Bitcoin short position. This guide is only simplistic in outlining the concept of shorting Bitcoin. The entire process is more complex than this, hence, we highly advise you to watch an explanatory video below as well.

Recommended video: How to Short Crypto on Binance (Step By Step)

Here’s how you can short crypto on Binance. Shorting is essentially borrowing to sell in the open market in the expectation that you can buy it back for less than you sold it for and profit from the difference. Source: Crypto For Canadians YouTube

To profitably engage in shorting crypto, you will need to learn how to effectively analyze the market using both fundamental and technical approaches. Then you must learn how to manage your risk exposure using stop losses while taking profits at appropriate levels.

Remember to repay the loan once the trade is closed at a later date. Hopefully, you will have earned a profit, but regardless of whether the trade worked out in your favor, you have to refund the borrowed coins. To do so, buy back the coins you sold, then repay the loan.

Final thoughts

Unlike most traditional financial instruments such as stocks, bonds, funds, and fiat currencies, Bitcoin is a highly volatile asset making it more appealing to investors and traders with increased risk appetite. Shorting it is one of the ways to benefit from its erratic price movements and could potentially lead to massive gains.

On the flip side, shorting comes with risks that you, as an investor, need to consider before opening any trade. Hopefully, you have learned how to short Bitcoin from this guide. Always remember to employ appropriate risk and trade management strategies to mitigate any losses that may result from Bitcoin volatility.

Frequently Asked Questions on How to Short Bitcoin

What does it mean to short Bitcoin?

Shorting Bitcoin (or any asset) is a trading practice in which the investor seeks to benefit from a falling price of the coin. In its simplest form, the investor borrows the asset from a broker, sells it, and buys it back to refund, keeping the difference as a profit (or loss).

What Are the Risks of Shorting Bitcoin?

Shorting Bitcoin is risky, given that the asset is highly volatile compared to most other tradable assets. Additionally, when shorting, it means that you are betting the price will fall, and you will make a profit. The profit potential, in this case, is limited as the price cannot go lower than zero, but the flip side is that the price could continue rising exponentially, exacerbating your losses.

Is it worth it to short Bitcoin?

Shorting Bitcoin allows the investor to benefit from a falling Bitcoin price. Markets don’t advance in a straight line. Typically, there will be corrections, which could offer an astute trader a chance to make a profit as the asset advances and retraces.

What Are Some of the Most Common Ways to Short Bitcoin?

The more popular ways of shorting Bitcoin are:

  • Spot margin trading;
  • Bitcoin options trading;
  • Bitcoin futures trading;
  • Inverse Bitcoin exchange-traded products (ETPs).

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Justinas Baltrusaitis
Author

Justin crafts insightful data-driven stories on finance, banking, and digital assets. His reports were cited by many influential outlets globally like Forbes, Financial Times, CNBC, Bloomberg, Business Insider, Nasdaq.com, Investing.com, Reuters, among others.