How to Short Bitcoin (CFDs, Exchanges, Options)

Summary

In this episode of 'Crypto Whiteboard Tuesday', Nate Martin from 99Bitcoins.com explains the concept of short selling Bitcoin, a strategy used to profit when the price of an asset is expected to drop. He clarifies that shorting involves borrowing Bitcoins, selling them at current prices, and then repurchasing them at a lower price to return to the lender, aiming to make a profit from the price difference. Martin warns of the risks involved, such as the potential for unlimited losses if the price goes up, and the possibility of a short squeeze. He also discusses various methods to short Bitcoin, including CFD trading, leveraging through exchanges like Bitfinex and Kraken, and options trading on platforms like BitMEX. The video emphasizes the importance of understanding market dynamics, regulatory changes, and significant events that could impact Bitcoin's price before attempting to short sell. It concludes with advice to gain trading experience before engaging in short selling and to never invest more than one can afford to lose.

Takeaways

• 📉 **Short Selling Bitcoin**: It's an investment strategy where you profit from expecting a price drop without owning the asset.
• 💡 **Understanding Short Selling**: You borrow an asset, sell it, and buy it back later at a lower price to repay the lender, profiting from the price difference.
• ⚠️ **Risks Involved**: Short selling is risky because if the price goes up, your losses can exceed your initial investment.
• 🚨 **Short Squeeze**: A rapid increase in price can occur when many traders try to close their short positions, causing further buying pressure.
• 💻 **Trading Platforms**: To short Bitcoin, you need a platform that allows short selling, such as CFD trading or leveraged shorting through exchanges.
• 💡 **CFD Trading**: Contract for Difference allows you to profit from price movements without owning the asset, but it's suitable for experienced traders.
• 🔄 **Leveraged Shorting**: Allows borrowing more than your deposit to increase potential profits, but also magnifies losses.
• 📈 **Market Timing**: Successful short selling can depend on timing the market correctly, understanding trends, and reacting to significant events.
• 🔍 **Technical Analysis**: Examining Bitcoin price charts and understanding market events can help identify potential short selling opportunities.
• 📚 **Regulatory Impact**: Regulatory actions or news from major countries can influence Bitcoin's price, presenting short selling opportunities.
• 📈 **Volatility**: Bitcoin's volatile nature means short selling can be profitable but also carries significant risk due to unpredictable price movements.

Q & A

What does 'shorting Bitcoin' mean?

Shorting Bitcoin, or short selling, is an investment strategy where you aim to profit from a decrease in the price of Bitcoin. You do this by borrowing Bitcoin, selling it at the current price, and then buying it back later at a lower price to return to the lender, hoping that the price drop will result in a profit.

Why is short selling considered risky?

Short selling is risky because there's no upper limit to potential losses. If the price of Bitcoin goes up instead of down, you could be required to buy back the borrowed Bitcoin at a much higher price, leading to significant losses beyond your initial investment.

How can someone short sell Bitcoin without owning any?

You can short sell Bitcoin without owning any by borrowing them from a broker or another entity that does own them. You then sell the borrowed Bitcoin with the expectation that you can buy them back at a lower price in the future.

What is a 'short squeeze' in the context of trading?

A short squeeze occurs when a rapid increase in the price of an asset, like Bitcoin, forces short sellers to close their positions by buying back the asset, which can lead to even more buying pressure and a further price increase.

What is a CFD and how does it relate to short selling Bitcoin?

A CFD, or Contract for Difference, is a financial instrument that allows you to speculate on the price movement of an asset without actually owning it. In the context of short selling Bitcoin, a CFD would allow you to profit from the price decrease of Bitcoin without the need to physically borrow and sell the coins.

What are some platforms that allow short selling of Bitcoin?

Some platforms that allow short selling of Bitcoin include eToro, Plus500, Bitfinex, Kraken, and BitMEX. These platforms offer different types of services, such as CFD trading, direct short selling, and options trading.

What is leveraged shorting and why is it considered more risky than regular shorting?

Leveraged shorting is a method where you borrow more money than you have in your account to increase the amount of Bitcoin you can short sell. It is considered more risky because it magnifies both potential gains and losses. If the market moves against you, the losses are also magnified, and the exchange may close your trade to prevent further liability.

What is the maximum profit one can make from short selling Bitcoin?

The maximum profit from short selling Bitcoin is limited to the scenario where Bitcoin's price drops to zero. In this case, you would not have to spend anything to buy back the borrowed Bitcoin, and you get to keep all the money you received from selling it short.

How does the price of Bitcoin typically behave according to the saying mentioned in the script?

According to the saying 'price takes the stairs up and the elevator down,' the price of Bitcoin tends to increase gradually over time (like climbing stairs), but can drop sharply and quickly (like falling in an elevator), indicating that downtrends are often sudden and steep.

What are some events that have historically caused the price of Bitcoin to drop?

Some historical events that have caused the price of Bitcoin to drop include the failure of major exchanges like Mt. Gox or BTC-e, regulatory actions such as bans in China, SEC crackdowns on ICOs, changes in the Bitcoin development team, and technical setbacks like delays in implementing upgrades.

What advice is given for someone who is new to trading Bitcoin and considering short selling?

For someone new to trading Bitcoin, it is advised to gain experience with regular trading before moving on to more complex strategies like short selling. It's also crucial to understand the risks involved and to never invest more than you can afford to lose.

Why might short selling Bitcoin be less effective when certain events occur, even if they seem significant?

Short selling Bitcoin may be less effective because the market's reaction to certain events can be unpredictable. For example, the failure of darknet markets or claims about the identity of Satoshi Nakamoto have had less impact on Bitcoin's price than some might expect. This shows that not all seemingly significant events will necessarily cause the price to drop.

Outlines

00:00

🤔 Understanding Short Selling Bitcoin

This paragraph introduces the concept of short selling Bitcoin, an investment strategy used to profit from a predicted drop in the asset's price. It explains that short selling involves borrowing the asset (Bitcoin in this case) and selling it at the current market price with the intention of buying it back later at a lower price to return to the lender, thus profiting from the price difference. The speaker, Nate Martin from 99Bitcoins.com, cautions that short selling is not advised without proper trading experience due to its risks, including the potential for unlimited losses if the asset's price increases instead of decreases. The explanation includes an illustrative example of short selling 10 Bitcoins and the possible outcomes, emphasizing the importance of understanding the risks and the mechanics of short selling before engaging in such trades.

05:02

📉 Risks and Methods of Short Selling Bitcoin

This paragraph delves into the risks associated with short selling Bitcoin, highlighting that losses can exceed the initial investment, especially with leveraged short selling. It outlines different methods for short selling Bitcoin, such as trading through CFDs (Contract for Difference), which allows for profiting from price differences without physically handling the cryptocurrency. The paragraph also discusses the use of leverage, which multiplies both potential gains and losses, and the practice of short selling through exchanges like Bitfinex and Kraken. It touches on Bitcoin options trading, which is considered complex and suitable only for experienced traders. The speaker advises on the importance of timing the market correctly and understanding the factors that can influence Bitcoin's price, such as regulatory actions, exchange failures, and developer changes. The paragraph concludes with a reminder of the inherent risks of short selling and a suggestion to gain experience in regular trading before attempting more complex strategies.

Keywords

💡Short Selling

Short selling, often referred to as 'shorting,' is an investment strategy where an investor seeks to profit from a decline in the price of an asset, such as Bitcoin. It involves borrowing the asset and selling it with the expectation of buying it back later at a lower price to return to the lender, thus profiting from the price difference. In the context of the video, short selling is the primary method discussed for making money when one anticipates a drop in Bitcoin's value. An example from the script illustrates this process with a hypothetical scenario where 10 Bitcoins are short sold at $10,000 each, and later repurchased at $8,000 each, resulting in a profit.

💡Cryptocurrency

Cryptocurrency is a digital or virtual form of currency that uses cryptography for security and operates independently of a central authority. Bitcoin, the focus of the video, is the first and most well-known cryptocurrency. It is integral to the video's theme as it is the asset being discussed for short selling. The script explores various ways to trade Bitcoin, including short selling, and highlights its volatility, which is a key factor in the decision to short sell.

💡CFD Trading

CFD stands for Contract for Difference, which is a financial instrument that allows traders to speculate on the price movement of an asset without actually owning the asset. In the context of the video, CFD trading is presented as an alternative to traditional short selling. It enables traders to profit from the price difference of Bitcoin without the need to physically sell and buy back the cryptocurrency. The script mentions platforms like eToro and Plus500 that offer CFD services for Bitcoin trading.

💡Leverage

Leverage in trading refers to the use of borrowed funds to increase the potential return on investment. The video discusses leveraged shorting, where an investor can borrow more money than they have deposited to short sell a larger amount of Bitcoin. This magnifies both potential gains and losses, making it a high-risk strategy. An example in the script explains that with a 1:3 leverage ratio, a $400 increase in Bitcoin's price would result in a $1,200 loss for the investor.

💡Short Squeeze

A short squeeze occurs when a sharp increase in the price of a heavily shorted asset forces short sellers to close their positions by buying back the asset, which in turn drives the price up even further. The video uses the term to describe a scenario where Bitcoin's price rises unexpectedly, causing significant losses for those who have short sold the cryptocurrency. It highlights the risk associated with short selling in a volatile market.

💡Volatility

Volatility refers to the tendency of an asset's price to fluctuate dramatically over a short period of time. Bitcoin's volatility is a recurring theme in the video, as it is a key factor in the decision to short sell. The script emphasizes that the potential for large price swings in Bitcoin makes short selling a risky strategy, especially for inexperienced traders.

💡Technical Analysis

Technical analysis is a method used by traders to predict the future price movements of an asset by analyzing statistical trends gathered from past market activity, primarily through the use of charts and patterns. The video suggests that technical analysis can help identify potential short selling opportunities by examining Bitcoin's price charts. It is presented as a tool that traders can use to time their market entries and exits.

💡Regulatory Actions

Regulatory actions refer to the steps taken by governments or regulatory bodies that can impact the operation or value of an asset, such as cryptocurrency. The video discusses how news of regulatory actions, such as bans or crackdowns on ICOs, can lead to price drops in Bitcoin. These events are considered by traders as potential triggers for short selling opportunities.

💡Market Timing

Market timing involves making investment decisions based on predictions about short-term price movements. The video touches on the concept of timing the market when considering short selling Bitcoin. It cautions that while some events, like regulatory changes or major exchange failures, have historically led to price drops, predicting market movements with certainty is difficult.

💡Risk Management

Risk management is the process of identifying, assessing, and mitigating potential risks to an investment. In the context of the video, risk management is crucial for anyone considering short selling Bitcoin. The script emphasizes the importance of understanding the risks involved, such as the unlimited loss potential when short selling, and advises traders to gain experience with less complex trading methods before attempting short selling.

💡Options Trading

Options trading involves buying or selling options, which are contracts that give the holder the right, but not the obligation, to buy or sell an underlying asset at a set price within a certain time period. The video briefly mentions Bitcoin options trading as a more complex and higher leverage method for short selling. It is presented as a strategy that offers greater flexibility but is not recommended for beginners due to its complexity.

Highlights

Short selling, or 'shorting', is an investment method used to make money when expecting an asset's price to drop.

Shorting involves borrowing an asset like Bitcoin and selling it at the current price, with the intention of buying it back later at a lower price to repay the lender.

The potential profit from shorting comes from the difference between the selling price and the repurchase price of the asset.

Short selling carries the risk of unlimited losses if the asset's price increases instead of dropping.

The entity that lends the asset for short selling can demand the return of the asset at any time, which may not coincide with a favorable price drop.

An example illustrates the process of short selling 10 Bitcoins, making a profit of $20,000 if the price drops from $10,000 to $8,000.

CFD (Contract for Difference) trading is an alternative to traditional short selling, where traders agree to settle on the price difference without actually handling the asset.

CFD trading is suitable only for experienced traders due to its high risk.

Some Bitcoin exchanges offer short selling options, including leveraged shorting which allows borrowing more money than deposited to short sell.

Leveraged shorting amplifies both potential gains and losses, making it a high-risk strategy.

Bitfinex, Kraken, and BitMEX are examples of exchanges that allow short selling Bitcoin and options trading.

Options trading provides flexibility and higher leverage but is complex and not recommended for beginners.

Timing the market for short selling involves understanding Bitcoin price trends and being aware of events that can impact its price.

Past events such as the failure of major exchanges, regulatory actions, and developer changes have historically caused Bitcoin's price to drop.

Short selling is common in stock trading and other financial markets and is increasingly popular in the cryptocurrency space.

It is crucial to understand the rules and regulations of short selling before engaging in this strategy.

New traders should gain experience with regular trading before attempting complex methods like short selling.

Always invest only what you can afford to lose, emphasizing the importance of risk management in trading.

Transcripts

What is shorting Bitcoin?

Is there a way to make money from Bitcoin even when I think its price is going to drop?

And how can I do that if I don’t own any Bitcoins?

Well, stick around,

in this episode of Crypto whiteboard Tuesday

we’ll answer these questions and more.

Hi, I’m Nate Martin from 99Bitcoins.com

and welcome to Crypto Whiteboard Tuesday

where we take complex cryptocurrency topics,

break them down and translate them into plain English.

Before we begin, don't forget to subscribe to the channel

and click the bell so you’ll immediately get notified

when a new video comes out.

Today’s topic is short selling Bitcoin.

Short selling (often referred to as just ‘shorting’) is an investment method for making money

when you expect an asset’s price to drop.

It’s called “short selling” because you are short,

meaning you don’t actually have any of the asset you want to sell in order to turn a profit.

Keep in mind that neither I nor anyone on the 99Bitcoins team is a financial advisor,

and this video shouldn't be considered financial advice.

The purpose of this lesson is to explain short selling as a tool.

It’s available in various markets, and is also available for cryptocurrencies,

so I want you to better understand what it is.

Basically, shorting works by borrowing an asset, such as Bitcoin,

and selling it at its current price.

Later on, you’ll need to purchase those Bitcoins back in order to repay the person or company

from whom you borrowed them.

Hopefully, by the time you go to buy those Bitcoins back, prices will have dropped,

and you will have spent less money to purchase the assets that need to be paid back than what you received when you sold them.

Let's illustrate this with an a example:

Imagine you short sell 10 Bitcoins when the price of a Bitcoin is $10,000.

This means you borrow 10 Bitcoins and turn around and sell them, receiving $100,000.

This nets you the $100,000 while leaving you 10 Bitcoins short.

Now fortunately, some time after you sell the coins, the price of Bitcoin drops to $8,000.

You see your chance and repurchase those 10 Bitcoins for a total of $80,000

and then take those 10 Bitcoins back to the person from whom you borrowed them.

When all is said and done, using no money or assets of your own,

you’ve made a profit of $20,000.

Hang on!...Don’t go applying for a trading account just yet!

Keep in mind that when you short-sell, the entity that loaned the Bitcoins to you

can generally require that you pay back those assets at any given time.

They’re only required to give you a short amount of time as notice.

This means you may be required to return the Bitcoins

before the price has dropped to the desired level.

Sure, the further the price drops, the cheaper it will be to buy

these 10 Bitcoins back and the bigger your profit would be.

But, what happens if Bitcoin’s price were to go up?

The maximum profit of a short is limited to how much you make if Bitcoin’s price goes to 0,

meaning you get to keep all of the profit because don’t need any money

to buy back the Bitcoins.

But there is no upper limit to how much you could lose when shorting.

Let’s talk about that for a minute...

Normally, when you invest in an asset, your losses are limited to the amount of money

you used to buy that asset.

Say you invest $10,000 dollars in a stock,

and that stock suddenly collapses and becomes worthless:

Well, your losses will be limited to the $10,000 dollars you initially put up.

When short selling, however, your losses could extend far beyond your initial investment,

something that is very important to consider, especially with a volatile asset like Bitcoin.

Let’s go to another example:

Let's say you short-sold $10,000 worth of Bitcoin

back when the price was only $1,000 per coin.

But you have yet to repurchase those coins,

meaning that you still have to pay the owner back those 10 Bitcoins.

Now imagine that all of a sudden prices shoot up to $10,000,

which can definitely happen given Bitcoin’s volatile nature.

This means that the 10 Bitcoins you need to pay back is now going to cost you $100,000!

And if there are other traders who are in the same type of short position as you are,

they’ll want to close their short positions by buying back the Bitcoins they borrowed

- applying even more buying pressure to the market, causing an even bigger price increase.

This is known as the short squeeze.

As you can see, short-selling can be extremely risky.

If you’re just starting out with Bitcoin, or any other asset for that matter,

you’ll probably want to avoid short selling until you’ve gained some trading experience.

Now that you know what short selling is, let’s take a deeper look at how it’s done.

To short Bitcoins, you need to find a trading platform

that will allow you to place a short sell order.

Today there are a variety of ways to short Bitcoin.

The first option is through CFD trading.

CFD stands for Contract for Difference.

It means that instead of actually borrowing Bitcoins,

selling them and then buying them back at a lower price

you agree to just settle on the difference.

So in the case of CFDs you will get paid the difference if the price drops

without needing to go through all of the hassle of selling and then buying the coins back…

Companies like eToro, Plus500 and others supply cryptocurrency CFD services

that allow you to short sell Bitcoin.

Keep in mind that CFD trading carries a high level of risk

and is really only suitable for experienced traders

as the majority of people trading CFDs end up losing their money.

If you don’t want to use a CFD service you can short sell Bitcoins through an exchange.

Bitcoin exchanges that are geared towards crypto traders offer short selling options,

and some allow for leveraged shorting as well.

Leveraged shorting means you can borrow more money

from the exchange than you actually have deposited there,

in order to buy the Bitcoins you want to short.

For example, say you have $1,000 on the exchange

and you leverage on a 1:3 ratio, giving you the ability to short sell up to $3,000,

which is 3 times what you have.

Leveraging is considered even more risky since if things don’t go as you intended,

the exchange might close your trade itself,

sooner than you expected - because they know you’re using money you don’t really own.

If you’re leveraging at a 1:3 ratio, any move in the market has triple the effect.

So if Bitcoin were go to up by $400 you actually lose $1,200.

In other words, leveraging magnifies both gains and losses.

If you stand to lose more than the $1000 you have deposited with the exchange,

they’ll close the position once you hit the $1000 mark

rather than risk having to try to collect additional funds from you in the future.

Some of the major exchanges that allow you to short sell Bitcoin include Bitfinex and Kraken.

And, some specialized exchanges, such as BitMEX, also offer Bitcoin options trading.

Purchase of an option grants the ability, but not the obligation,

to trade at a specific price by a specific date.

If you have experience with options trading this method might suit you,

otherwise it’s not recommended for beginners.

Options are complex but do allow for greater flexibility and higher leverage.

If you want to learn more about the services I’ve just mentioned

take a look at the links below this video.

Ok, so when is a good time to short sell?

Well, if you examine the Bitcoin price charts, you’ll soon realize the truth of the old saying,

“price takes the stairs up and the elevator down.”

Whereas uptrends take time to build and develop,

downtrends tend to be relatively short and sharp.

However, if you still want to take a shot at timing the market,

beyond technical analysis which is explained in our Bitcoin trading video,

it helps to have a solid knowledge of the Bitcoin space.

Different types of events have different effects on Bitcoin’s price.

For example, there were major price drops following the failure of major exchanges

like Mt. Gox or BTC-e.

Also, news of hostile regulatory actions in major countries

such as the Bitcoin bans in China, or the SEC clampdowns on ICOs,

tends to cause the price of Bitcoin to move downwards.

Changes in the Bitcoin development team, such as the exit of lead developer Mike Hearn,

for example; has also resulted in price drops.

Other examples of past events that dropped Bitcoin’s price include the Bitcoin Cash fork

and delays or setbacks in widely-desired upgrades like SegWit or the Lightning Network.

If you had shorted Bitcoin prior to these events you would have made you a lot of money.

So from examining these examples, we can learn some clues

for potential shorting opportunities;

So, does this mean that we can foresee the effect of some event on Bitcoin’s price?

Not necessarily.

Some events that many would have believed to cause a change in Bitcoin’s price

have had no effect at all.

For example, the failure of darknet markets such as Silk Road or Alpha Bay

resulted in much less dramatic drops than some expected.

Claims of having unmasked the identity of Satoshi Nakomoto

as in the case of Dorian Nakomoto or Craig Wright also resulted in little to no impact.

Additionally, media FUD, which stands for Fear Uncertainty and Doubt about Bitcoin,

has had less and less effect on the markets of late.

After nearly 400 Bitcoin obituaries,

new reports of Bitcoin’s imminent demise aren’t given much credence anymore.

To conclude, short selling, risky though it may be,

is actually very common in the trading of stocks and in other financial markets,

and increasingly now in crypto.

Just make sure you read any rules, regulations, or guidelines for “covering” any assets

you short sell so you’ll know exactly what you’re getting into.

If you’re just starting out, gain some experience with regular trading

before moving into more complex methods like shorting.

And as always, never invest amounts you can’t afford to lose.

That’s it for today’s episode of Crypto Whiteboard Tuesday.

Hopefully by now you understand what shorting Bitcoin is

- A way to profit from Bitcoin’s price drops.

You may still have some questions.

If so, just leave them in the comment section below.

And if you’re watching this video on YouTube, and enjoy what you’ve seen,

don’t forget to hit the like button.

Then make sure to subscribe to the channel and click that bell

so that you’ll be notified as soon as we post a new episode.

Thanks for joining me here at the Whiteboard.

For 99bitcoins.com, I’m Nate Martin,

and I’ll see you…in a bit.