Many big names in the business and finance world, including Billionaire Bill Gates, have claimed they would short Bitcoin if there was a way to do so.
Well, there isn’t just one way to short Bitcoin, but in fact, there are multiple.
Throughout this guide, we compare the best ways to short Bitcoin and also outline some of the reasons and risks of shorting BTC.
How to short Bitcoin
1. Margin exchanges
Cryptocurrency margin trading exchanges differ from regular exchanges in two major ways.
First, they allow traders to profit regardless of which direction the market moves in by providing the ability to go long or short. They also allow traders to multiply their exposure to the market using leverage, which can turn small market movements into substantial profits (or losses).
Because of this, margin exchanges are one of the most popular ways to short Bitcoin, since they can allow for incredible profits, even when only trading with a small amount or when the market is bearish.
Two of the most popular Bitcoin margin trading exchanges are BitMEX and ByBit since both allow traders to speculate on the value of Bitcoin with up to 100x leverage.
BitMEX is widely considered to be the world leader in the Bitcoin margin trading space thanks to the huge liquidity it provides users. The platform also has a low minimum position size requirement for its Bitcoin contracts, making it ideal for new traders.
ByBit, on the other hand, is a newer platform that separates itself from the competition thanks to its incredible speed—capable of handling up to 100,000 transactions per second.
ByBit also features a useful testnet feature, allowing users to practice how to short Bitcoin without risk.
2. Bitcoin Options
Bitcoin options are a type of financial instrument that allows traders to bet on the price of Bitcoin at some point in the future. These come in two main types; calls and puts.
By buying Bitcoin call options, you are expecting that Bitcoin will increase in value over the contract period. Bitcoin call options give you the right to purchase an agreed quantity of Bitcoin at the strike price when the option expires.
Alternatively, if you believe that the price of bitcoin will go down, you would want to purchase a ‘put’ option. This will allow you to sell a fixed quantity of BTC at the strike price up to the expiry date. If this strike price is higher than the current market value, then exercising the option will turn you a profit.
Deribit is arguably the leading Bitcoin options exchange, offering European-style Bitcoin options with a range of different expiration dates and strike values. Deribit also offers up to 100x leverage, allowing for multiplied exposure to the market.
Alternatively, LedgerX is another popular Bitcoin options exchange. LedgerX sets itself apart from the competition by being a regulated platform and offering Bitcoin options with strikes as high as $50,000, and as low as $2,000.
3. Futures markets
Bitcoin futures are a simple way to speculate on the future price of Bitcoin. By purchasing a Bitcoin future, you are essentially betting on the future value of Bitcoin at the contract expiry date.
By taking a long position, you are agreeing to buy Bitcoin at a specific price when the contract expires. Whereas taking a short position allows you to sell Bitcoin at a specific price when the contract expires.
Because of this, long positions will be in profit when BTC is higher than the contract price, whereas short positions will be in profit when BTC is lower than the contract price.
Bitcoin futures are an excellent way to short Bitcoin since they don’t require you to own any Bitcoin. This is ideal for those that want to avoid the hassles of holding and securing Bitcoin, while still profiting from a decline in its value.
CoinFLEX and CME are two popular Bitcoin futures trading platforms. CoinFLEX stands apart from the competition by being the world’s first physically settled cryptocurrency futures exchange, while offering extremely low fees and up to 20x leverage.
CME, on the other hand, features an impressive volume and allows users to trade a huge number of derivatives, including Bitcoin futures.
4. Selling spot Bitcoin
A Bitcoin spot exchange is a trading platform that allows users to buy and/or sell BTC at the market rate. These are different from derivatives trading platforms since the actual bitcoin digital asset changes hands when using the spot exchanges.
Most traders sell Bitcoin on spot exchanges before learning how to short sell Bitcoin on margin platforms. By selling Bitcoin during a declining market and buying back at the lowest point of the dip, it is possible to profit by the difference between the selling price and repurchase price.
This is simpler than shorting bitcoin derivatives but can be similarly profitable.
When deciding on where to short bitcoin for the first time, there are two platforms that stand out as the ideal candidates; Coinbase and eToro.
Coinbase is often considered one of the simplest platforms to use and features both impressive liquidity and security. However, Bitfinex is arguably the most advanced spot trading platform while providing support for only high-quality digital assets.
5. Prediction markets
Although prediction markets are one of the less common ways to speculate on the price of bitcoin, they are easily accessible, making them an attractive option for those looking to short BTC.
Prediction markets are derivatives that base their value on the probability of an event occurring. In the case of Bitcoin, these prediction market contracts typically predict the value of BTC at a fixed date.
Because of this, prediction markets are very similar to binary options.
By buying and selling shares in Bitcoin prediction markets it is possible to profit when the bitcoin value falls. To do this, you would want to short sell shares in a market that predicts a bullish outcome for bitcoin or buy shares in prediction markets that predict a bearish outcome for bitcoin.
Currently, BetMoose and Predictious are the best platforms for those learning how to short sell Bitcoin using prediction markets, since both offer an extremely intuitive user interface.
On one side, BetMoose offers multi-option prediction markets and anonymous registration, whereas Predictious is cheap to use, with no deposit/withdrawal fees and a low share cost.
Why short Bitcoin?
Contrary to popular belief, there are more reasons to short Bitcoin than just to profit from a price decline. Let’s now explore the 4 main reasons why people short Bitcoin.
1. To speculate for profit
The most popular reason traders turn to short Bitcoin is simple—profit. Being such a volatile asset, Bitcoin naturally experiences both significant upswings and dramatic downswings.
In fact, throughout 2018, Bitcoin lost over 70% of its value, much to the joy of those shorting BTC at the time.
Although Bitcoin volatility has been gradually falling since around 2013, it is still massively higher than most other financial instruments.
With 30-day average volatility of between 3-4%, Bitcoin easily eclipses gold’s ~1.2% and the less than 1% seen by most fiat currencies.
Because of this, shorting Bitcoin can be an extremely profitable venture—giving traders the opportunity to profit from Bitcoin’s regular price dips, while ensuring that even bear markets can be profitable.
2. To hedge a portfolio
Another common reason to short Bitcoin is to hedge against a long position in Bitcoin or another asset that tends to move against BTC. By opening a short hedge with Bitcoin derivatives contracts, you can offset any losses experienced by a long position.
This is useful because most Bitcoin derivatives allow you to trade with leverage, meaning you can protect your long position against losses with as little as 1% of your long position value.
Note that hedging a Bitcoin portfolio by opening a short position can be expensive, particularly when using leverage since margin funding fees can quickly rack up. Because of this, it is usually only a good idea to hedge your portfolio for a short period of time.
3. To hedge a mining operation
As most Bitcoin miners are aware, the profitability of Bitcoin mining is related to three main factors; electricity cost, mining hardware cost and the value of the bitcoin.
Neither electricity costs or mining hardware costs fluctuate significantly over time, typically making the Bitcoin value the only variable that Bitcoin miners need to contend with. When BTC loses value, mining profitability usually drops too.
In light of this, many Bitcoin miners opt to short Bitcoin to hedge their risks. This is usually achieved by short-selling Bitcoin futures or buying put options at one of the numerous Bitcoin derivatives trading platforms.
4. To exploit a market arbitrage
More advanced traders might also look to short Bitcoin as a way of taking advantage of market arbitrage opportunities between different derivatives exchanges.
By opening a long position on a platform with a high BTC price, and shorting BTC on a platform with a low BTC price, traders can capitalize on the price difference between the two futures positions when the contracts expire.
This is a relatively low-risk way to make money with Bitcoin, particularly when the markets are experiencing lower than usual volatility.
Risks of shorting Bitcoin
Just like any activity involving Bitcoin trading, shorting BTC is incredibly risky. You should not short Bitcoin unless you are an advanced trader and have a proper risk management plan.
1. Betting against a long-term bull trend
Although shorting Bitcoin can be a profitable endeavor, doing so over a long period of time could potentially result in significant losses, since Bitcoin has been predominantly bullish since its launch more than a decade ago.
In fact, Bitcoin has seen its value multiply dramatically in this time frame. In the past three years, Bitcoin has seen its value swell more than 1,600%, and is currently up more than 35% in the last year.
Had you shorted Bitcoin over this time frame, you would have almost certainly been forcefully liquidated—losing your principal amount.
Not only this but even when consideration shorter timeframes, Bitcoin tends to show bullish trends. For example, Bitcoin closes higher than it opens more often than not across any time-frame measured, meaning that on the whole, shorting is historically less profitable than being long.
Because of this, it is important to be aware of the broader trend when choosing to short Bitcoin, making sure to keep short positions only for as long as necessary.
2. Getting a position liquidated
Liquidation is a process which sees a trading platform automatically close any open positions that fall below the required margin threshold. The margin platform will force the sale of these positions at the best available rate—which could be significantly lower than the market rate if liquidity is low.
Since the Bitcoin market is particularly volatile, wild price swings can see highly leveraged positions get liquidated. For this reason, it is important to only trade with as much leverage as you are comfortable with since increased leverage makes you more vulnerable to automatic liquidation.
For example, if you have a 1 BTC short position open with 100x leverage, then BTC gaining in value by 1% would technically increase your leverage to 101x.
Usually, margin exchanges will give you time to increase your initial margin to reduce your leverage, however, this is not always possible when the market is particularly erratic.
Some margin exchanges will automatically deleverage your positions when your margin falls below maintenance levels. This essentially means that your position will stay open longer since the exchange will automatically sell part of your position to bring your margin ratio back within acceptable limits. Consider this when choosing where to short Bitcoin.
3. Losing money on unexpected bullish events
Another common issue that most people shorting Bitcoin will eventually encounter is a sudden loss due to unexpected market events.
Since the value of Bitcoin is largely driven by recent news, positive events can lead to a swift and sometimes significant price spike. This can lead to highly leveraged short positions being forcefully closed while causing a loss on other remaining short positions.
For example, when Facebook announced it would be launching its own cryptocurrency back in June 2018, the entire cryptocurrency market experienced a bullish change in momentum. In the days following the announcement, bitcoin gained over 40%—bad news for anybody shorting at the time.
Because of this, it is important to learn how to short bitcoin responsibly, while ensuring you stay on top of recent events to can react quickly when necessary. Fortunately, although many bullish price movements are sporadic and unpredictable, some events are well-known to be bullish, giving shorts ample time to react.
Some events that are likely to be bullish include Bitcoin’s upcoming halving event in mid-2020, as well as a possible bitcoin ETF approval later in 2019 or early 2020. Beyond this, any major bank or country buying BTC is typically a bullish signal, while large corporations or brands entering the space can also drive the price up.
Pascal is an investor and marketer focused on the intersection of cryptocurrency and the legacy financial system. He co-founded Bounty0x, which at the time was the largest crypto freelance platform. Now he dedicates his time to CoinDiligent and trading. You can get in touch with Pascal on LinkedIn.