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.