Shorting Bitcoin is a phenomenon every BTC enthusiast needs to be familiar with. There are several terms, such as shorting or short selling, that are necessary for beginners to understand. Knowing about different concepts related to buying, selling or trading crypto can make quite the difference and help them get a better understanding of what to expect from the crypto space.
Therefore, if you want to know ‘can I short Bitcoin?’ then you first need to learn about this concept and understand it.
Along with knowing what shorting means, you can also learn about how it works, what risks it poses and how can manage those risks. This brief guide addresses all the major aspects of shorting as seen below.
What Does Shorting Bitcoin Mean?
Shorting or short selling is an investment style that is often opted for by the people who do not believe in the long-term significance of a digital asset. In other words, crypto investors who believe that the price of BTC will crash in the future opt for shorting.
This type of investment style has its benefits but in order to understand those, you need to know how short selling works.
Shorting basically allows you to get some profits as the price of the digital asset, Bitcoin in this case, drops. Just like the rest of the crypto space, BTC is also known to be quite volatile. The unpredictability related to the price movement of the crypto king, provides numerous opportunities to people to long and short the asset.
If you want to know ‘can I short Bitcoin?’ then the next thing you need to know is how short selling works.
Understanding How Shorting Works
The basic idea of shorting Bitcoin is to borrow it from a crypto owner and sell it at its current price. This is doable with perpetual futures contracts, after which you will have to pay back the person you borrowed from. You can pay back at a set time and date.
However, it also important to keep in mind that you will benefit from short selling if the price of the flagship crypto asset drops after you short it.
This will also help you to pay back the person you borrowed from at a lower price.
Let’s consider an example to get a better understanding of the concept.
Example of Short Selling BTC
If you want to know ‘can I short Bitcoin?’ then you first need to understand how it works by taking a look at this example.
Let’s suppose you are a trader and you borrow 2 BTC when their price was $16,000 each. This means that you will be selling the two BTC for $32,000.
Now, when the price of BTC drops to $15,000 you close your position. This is done by buying the two BTC you borrowed before at a lower price i.e. $30,000.
Considering this your profit can be calculated as $32,000 – $30,000 = $2,000.
Risks Posed by Short Selling
Shorting Bitcoin is an interesting yet highly risky venture. The biggest risk posed by this investment style is that when you normally invest in a cryptocurrency and it goes through a price decline, you will only lose as much as you invest in it.
For example, if you invest $5,000 in BTC and it collapsed then you will only lose $5,000.
However, if you short sell Bitcoin, you may lose more than you initially invested. This greatly depends on the ratio you opt for while short selling Bitcoin or any other digital asset.
Risk Management Tips
If you start learning ‘can I short Bitcoin?’ then you also need to learn some tips so you can manage your risks. As a first-time short seller, you need to be careful otherwise your short trade can go south due to the volatility of the crypto market. Therefore, to minimize your risks and to ensure you have a good experience of shorting Bitcoin, you need to know some risk management tips.
Firstly, you need to be careful while setting a ratio to short and always go for a lower number if it is your first time doing so. Once you have a better idea of short selling is, you can then continue with a higher ratio if you prefer.
Secondly, you can also use the stop-loss function, which is widely used by the traders. This function sets a cut-off point in case your trade does not go well and minimizes the risks that you may face.
Short Selling in Three Easy Steps
Here are three simple and easy steps for every crypto investor who is interested in shorting Bitcoin.
- Opt for a secure and suitable exchange, sign up and deposit your BTC.
- Keep an eye out for a shorting opportunity.
- Execute your order.
For anyone interested in buying or selling crypto assets, it is important to be familiar with the concept of shorting Bitcoin. The information mentioned above can help you get a good idea and also determine if it is a suitable option for you or not.