Can Bitcoin be Shorted for Financial Gain
Can Bitcoin be Shorted
Bitcoin, for the uninitiated, is a digital currency whose value has risen by over 600% in only 5 years. Its value has crossed the $9500 mark yet it was below $2000 a few years ago. The meteoric rise of the currency has attracted interested parties who either want to witness the action or be a part of it.
Given the mind-boggling increase in value, it is a sure thing that there are significant profits to be made in bitcoin markets, regardless of whether its value depreciates or appreciates. But at the same time, without a sound approach, heavy losses can be incurred.
Shorting as a way to make profits off bitcoin
Shorting is simply betting that a currency will go down in such a way that you can make handsome returns if you play your cards right. It is the antithesis of the buy low-sell high principle that many people are familiar with. To short a currency, you sell a borrowed currency pair at a high price, expecting the rates to dip. When they do, you buy the currency once more and pocket the difference.
In practice, a broker is involved who facilitates the access to borrowed currency. Borrowing significantly reduces the costs and the broker gets to pocket a fee for facilitating the venture. You can only hire a currency for a specified time meaning that you have to be quite sure that the value will go down in a given timeframe or you will make a loss.
Therefore, provided the right conditions, any currency can be shorted including bitcoin. Before looking at how you can short the cryptocurrency and enjoy a slice of the bitcoin cake. First, it is essential to understand what the terrain ahead looks like.
The biggest challenge to shorting bitcoin
Shorting typically involves currency pairs such as Euro/USD, Yen/Pounds, etc. However, the majority of exchanges that support bitcoin do not offer currency pairs which actualizes the first impediment.
Then, there is the challenge of liquidity. Shorting thrives in highly liquid markets, and bitcoins are not that liquid. The supply of bitcoin is not only small but inherently limited. Their supply cannot surpass a 21 million ceiling. Breaking up the coins has been floated as a viable way to solve this problem.
How to short bitcoins
Challenges notwithstanding, enterprising brokers have strived to create an enabling environment to make shorting possible. After all, they get to earn their fee either way. The fastest and easiest way to short the cryptocurrency is through an exchange that supports margin trading.
However, since not many exchanges offer the functionality, you may have to part with steeper broker fees since the service competition is minimal. Bitmex, AVAtrade, and Plus500 support margin trading and more platforms are joining the fray. Hence, with time, the options will increase.
The futures market
Another way to short bitcoin is by leveraging the currency’s futures market. It is harder to short bitcoin in this manner since the cryptocurrency’s futures trade is not well developed. Principally, you purchase a security-contract combination. When the coin gains value, you sell your combination and pocket the difference.
To make money via shorting, you sell your futures contract and buy it back at a lower rate. The above is a simplified explanation, and things are a bit more complicated, but that is the gist of it. The current trusted bitcoin futures market is OrderBook.
In prediction markets, you make money by predicting future rates. You forecast future currency behavior by saying, for example, that bitcoin will reduce by 5% within a given duration. You then place a wager, akin to a sports bet, and if your prediction is correct, you walk away with winnings. Bitcoin prediction markets are still in their infancy, and it may be a challenge to find someone who will take you up on your bitcoin bets.
Dealing in assets
This is the most straightforward but also one of the most involving and risky ways to short bitcoin. Dealing with assets simply means that you accumulate bitcoin stock and then short-sell it when you predict that the market may dip. If the rates change unexpectedly, you can not only lose money but your assets as well.
Put and call options
Also called binary options trading, they provide another way to short bitcoin, but they are as risky as dealing in assets, if not more hazardous. To short bitcoin this way, you leverage a put option which is a contract that avails the option to sell securities at a specified duration and price.
After selling, you then capitalize on a call option which is the opposite of a put option to repurchase the security, thereby making money. As is evident, if your prediction is off either by time or price, you lose out.
Profitably shorting bitcoin calls for prowess in basic as well as assorted advanced trading maneuvers. If you are a novice, start small and take time to learn the ropes by using online resources and blogs such as those run by Bitgale.com. There may be good money to be made through shorting considering many experts foresee a bitcoin bubble burst soon.