If you are a crypto enthusiast then you need to know about shorting Bitcoin as well. One of several reasons why a vast audience feels inclined to join the crypto space is the availability of various opportunities to get some kind of benefits. Even if the benefits are never guaranteed, the possibility of enjoying some is a great driving force for many.
In other words, the crypto space is not limited to buying, selling and trading cryptocurrencies. People interested in making something of Bitcoin can also opt for shorting BTC.
This is a somewhat risky and requires the interested parties to be aware of all major details, some of which are mentioned below.
Therefore, if you want to learn more about shorting and if you want to know ‘can I short Bitcoin?’ then you need to know the information in this brief guide.
What Does Shorting Bitcoin Mean?
Shorting is also called short selling and it is an advanced investment style. It allows people to make profits when the price of a digital asset, Bitcoin in this case, drops. Since BTC is known to be quite volatile and the price sometimes fluctuates quite up and down, it gives a lot of opportunities to the people to short or long the crypto king.
There is some complexity that surrounds how it all works and comes together, which is discussed in detail below with the help of examples as well.
Basic Mechanism of How it Works
The basic idea of shorting BTC is that it allows the traders to borrow an asset, Bitcoin, and then sell it at its current price. Some platforms support perpetual contracts, which make it possible for traders to payback the person they borrowed from at a later time and difference.
Paying back the person you initially borrowed the funds from would generally become easier and less financially burdening if you have a profitable trade. This would be possible if the price of BTC drops after you short it.
Example of Short Selling BTC
A concept such as shorting Bitcoin can be understood more clearly if we consider an example. Taking an example can always make things seem easier.
Therefore, to understand how short selling works, let us consider an example.
Let us suppose, the price of BTC is $23,000 and you want to short 2 BTC. This would mean that you have borrowed 2 Bitcoin to sell them for $46,000.
Now let us suppose that the price of the flagship crypto asset drops to $22,000 and close the position. This will be done if you re-buy the 2 BTC you borrowed at a lower price, which would be $44,000.
According to this, the profit you will get will be calculated as:
$46,000 – $44,000 = $2,000
Risks of Short Selling BTC
Even though short selling has an upside for the traders, even if the prices of the digital asset drops, it has some risks as well.
If you invest in Bitcoin or any other cryptocurrency normally and the price of the asset drops, you will only lose as much as you have invested. For example, if you invest $2,000 in BTC and the price drops, you will only lose $2,000.
However, the risk of shorting Bitcoin is that the losses you might experience may go beyond what you originally invested. This would depend on the ratio you opt for. Therefore, if you want to know ‘can I short Bitcoin?’ then you need to be careful about the ratio you choose as well.
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Risk Management While Short Selling BTC
Since shorting Bitcoin can be quite risky, it is important to know any rules or tips beforehand so you can have a better and safer experience of short selling the crypto king.
Knowing any risk management tips can help inexperienced traders to avoid unnecessary losses even if the trade does not go well.
One of the most important and widely used function is the stop-loss function. This is applied when people want to both long or short Bitcoin.
The stop-loss function ensures that there is a cut-off point in case the trade does not go well. This prevents the traders from losing any more funds than they can afford to handle.
Simple Ways to Short Sell Bitcoin
If you are interested in short selling the crypto king then you need to know the simple steps you can follow.
These are three basic steps that are mentioned below.
- Sign up with a suitable trading platform and deposit Bitcoin
- Look for an opportunity when you can short BTC
- Execute the order
Any one new to the crypto space and interested in the flagship cryptocurrency needs to know what shorting Bitcoin is and how it works. If you understand the basic details of this investment style then you can also determine if this is suitable for you to opt or not.