Bitcoin (BTC) is an asset with extreme volatility, its price movement is known to be very wide. In January 2021, the price of BTC reached an all-time high of more than $41,000 but then fell below $35,000 within a week.
In 2017, following the Bitcoin price hit its previous record of nearly $20,000, BTC plummeted under $6,000 in 2018. The historical price pattern of BTC suggests that there is an opportunity to make a profit by short-selling Bitcoin.
There are many ways to short Bitcoin, some of the popular short-selling methods included exchange and derivative products. Short selling referred to the process of selling the cryptocurrency with the speculation that its value will fall, and buy the asset back at a lower price. Traders are looking to gain profit from the difference in market price.
Short Sell by Exchange
To short-sell Bitcoin, investors would need to find an exchange that offers a short-selling service to borrow the actual Bitcoin to sell it on the market.
For example, when the price of BTC was trading at $23,000 per BTC. Eric speculated that the market will turn bearish, and he decided to borrow one BTC from the exchange to sell it on the market. BTC price falls to $20,000 in the following week, Eric can buy the Bitcoin back with the new market price, and he will get a profit of $3,000. However, he will lose $3,000 if the BTC price rises to $26,000 instead.
Traders shorting Bitcoin using this method are exposed to the risk of “unlimited loss”, as there is no limit on how much BTC could rise, and traders must repurchase the Bitcoin that they borrowed. Selling Bitcoin on an exchange also involved borrowing fees, commission etc. Many traders have turned to derivative trading for a more efficient way of shorting Bitcoin.
Shorting Bitcoin with Bitcoin Futures
Derivative product is another way to short sell Bitcoin. A futures contract is a type of derivative product, which refers to an agreement to buy or sell a particular asset at a predetermined price at a specified time in the future.
Traders can short Bitcoin by selling a BTC futures contract with the expectation that the price of BTC will decrease in the future. Whereas, traders purchasing a BTC futures contract would expect the price of BTC will rise in the future.
Bitcoin futures contracts have expiration dates that can vary from no expiration date to one week. For example, BTCC bitcoin & ethereum futures trading platform offers perpetual contract, weekly contract and daily contract, where perpetual contract has no expiry date, while weekly contract, and daily contract expire daily and weekly respectively.
Another benefit of trading futures contracts is the use of leverage, which allows traders to maximize their potential profit with a small initial deposit, known as margin.
For example, a margin of 350 USDT allows you to open one lot of transactions for a BTC/USDT weekly contract with 100x leverage at BTCC. The exchange provides 10x, 20x, 50x, 100x, and 150x for Bitcoin futures trading. Traders can choose the type of futures contract and leverage it to suit their interest.
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Strategies to Short Sell Bitcoin
Traders can make their decision based on both technical analysis and fundamental analysis. It is very important to understand the market sentiment and conditions thoroughly to make an informed decision.
There are some events that have acted as catalysts for BTC price decline in the past. Events that have triggered price plummet included hard forks, regulatory concern, security incident of major exchanges, key developers exiting the Bitcoin network, and delay in major network upgrade.
Risk of Shorting Bitcoin
Bitcoin is well known for its extreme volatility, and the price of BTC has soared from 0 to all-time high of more than $41,000 over 9 years. Many people in the crypto space and critics believe in the potential of Bitcoin reaching over $100,000. For this reason, it can be very risky to short BTC in the long term as the historical price record suggests that the price of BTC can skyrocket at any time, which could create huge losses for investors.
Short selling is considered to be very risky. For instance, if you invest $2,000 in Bitcoin, your loss will be limited to $2,000 if the value of BTC plummets. However, your loss could surpass your initial investment when you short sell Bitcoin. For this reason, it is important to set up a take-profit and stop-loss price target when you trade Bitcoin futures contracts.
Bitcoin shorting can be profitable if you do it right. Traders who understand the market sentiment of Bitcoin as well as familiar with the leverage and derivative tool will have a bigger chance to profit from Bitcoin shorting. It is very important to do your own research, and choose a reliable cryptocurrency exchange to trade Bitcoin.
BTCC is one of the longest-running cryptocurrency exchanges in the industry, the ten years old exchange has operated since 2011 and has never experienced any security incident. The exchange focused on crypto derivative trading, users who make their first deposit at BTCC can get up to 2,000 USDT trading bonus.
BTCC official website: https://www.btcc.com