How to Short Sell Bitcoin

The cryptocurrency Bitcoin made a relatively unknown entry into the financial world when it was introduced in 2009. But its profile has steadily increased over the years as more and more people have become interested in this alternative form of currency.

Along with increasing interest in Bitcoin has increased rapidly but its value fluctuates. After spending most of the first half of 2017 hovering around $1,000, hitting $5,000 in October, breaking through $7,000 in early November and briefly $19,000 in December, before falling back below $7,000 in March 2018. Bitcoin’s most meteoric rise to date was then occurs from mid-September 2020, when the price is below $11,000, to early April 2021, when the price reaches $60,000. Bitcoin dropped back below $32,000 in July 2021, rebounded to breach $65,000 in November, and dropped back to around $36,000 in January 2022. By mid-May 2022, one Bitcoin was worth about $30,000. (By the way, you should know that you don’t have to own all of Bitcoin to invest in this cryptocurrency. You can buy a “fraction” or “percentage” of Bitcoin.)

More and more financial institutions are accepting Bitcoin. Many see Bitcoin as a safe haven in a volatile world economy, as Bitcoin is not controlled by any government. In May 2022, studies of Bitcoin’s safe-haven status were inconclusive.

Key Takeaways

  • Bitcoin has caught the attention of the mainstream financial press and the world’s biggest investors and major players in the investment world.
  • You can “short” Bitcoin. You can actually make a profit when any investment, including Bitcoin, goes down in value.
  • This means you can benefit from relatively small drops in value, as well as more extreme fluctuations in Bitcoin’s value.
  • As with any investment, learning how to sell short Bitcoins is no easy feat. It takes research and a willingness to take risks.

Bet Against Bitcoin

Despite the hype, the financial world is chewing a bit to bet against Bitcoin. Bitcoin futures are traded on CME Group Inc. (Chicago Mercantile Exchange) and TD Ameritrade.

Once those futures contracts become available, hedge funds and other large investors are ready to pounce. Why? Many financial observers say Bitcoin is the best shorting opportunity ever. Part of the reason is that after hitting $11,000 in value, the cryptocurrency dropped nearly 20% in value in less than six hours, to over $9,000. Then it hit over $11,000 again a few days. There is opportunity in that volatility.

Is Bitcoin’s Heyday Over?

Bitcoin has caught the attention of the mainstream financial press and the world’s biggest investors and major players in the investment world, not to mention the everyday trader who has come to understand that Bitcoin trading can be very profitable.

One way to get involved in this action is to buy Bitcoin and then hold it, waiting for its value to increase. When it reaches a price you are comfortable with, you can sell it and pocket a profit.

This was a more viable option many years ago, in the early days. Many Bitcoin millionaires were born in the early days. Take, for example, Erik Finman, who started investing in Bitcoin when it was only $12. Or take Barry Silbert, who bought 48,000 Bitcoins for $350 each in 2014 when the US Marshals Service auctioned off the stash of Ross Ulbricht, creator of the Dark Web site Silk Road, the New York Times reports.

To give you some perspective, if you had invested $1 in Bitcoin since its inception, at $0.06 in August 2010, it would be worth $500 million today. If you feel like you’re out of the boat with Bitcoin, you can always invest in other cryptocurrency alternatives to Bitcoin.

Is Bitcoin the Next ‘Big Short’?

That brings us to what many believe is the next way to make big money from the Bitcoin phenomenon: you can “short” cryptocurrency. What goes up must go down, and you can actually make a profit when any investment, including Bitcoin, goes down in value.

If you’re not familiar, shortening an investment is a relatively simple process—as far as actual trading goes. This is figuring out your investment game—and actually making a profit when the value of your investment goes up or down—that’s the hard part.

As with any investment, you can’t just jump into action without being informed and educated. But the good news is that you don’t have to be a pro. Anyone can learn how to short sell Bitcoin for potential profit.

With the price of Bitcoin continuing to be relatively volatile and many analysts claiming that its meteoric rise is unsustainable, the urgency to start trading and learn how to sell Bitcoin has never been more important. Another factor to consider is that world governments are closely watching Bitcoin exchanges and investments in cryptocurrencies. Due to its anonymity, authorities are concerned about possible tax evasion.

Options for Short Selling

Want to sell short Bitcoins? You have several options:

Bitcoin Direct Short Sale

This is the simplest type of Bitcoin short selling: you sell existing Bitcoin at a price you are comfortable with. Your hope is that the value will drop even further; and then, if you want, you can buy Bitcoin again at a lower price.

Bitcoin Margin Trading

Many people start short selling Bitcoin using margin trading platforms dedicated to cryptocurrencies. With this type of trading, you borrow money from a broker, place a trade, hoping that your bet pays off.

There are several Bitcoin exchanges that allow margin trading at this point, so you have plenty of options.

Bitcoin Futures Trading

You can also find ways to short sell Bitcoin in the futures market. Here’s how it works: the future is essentially a contract. You, as the buyer, agree to buy Bitcoin in the future at a certain fixed price. In this type of trading, you predict—expect—the price of Bitcoin will rise. That way, when your contract expires, you can buy Bitcoins below the market price.

Bitcoin Option Trading

Another way you can find out how to short sell Bitcoin is by options trading, which involves “put” and “call” options.

With a put option contract, you have the right to sell a certain amount of Bitcoin, which you set, at a certain price at a certain time. This is called the deal price. Put options gain value because Bitcoin loses value compared to this strike price.

Importantly, you are under no obligation to sell the option if you don’t want to. Call option contracts give you the right to buy shares in the same way. With this contract, you have the option to buy a certain amount of Bitcoin at a certain price until a certain date—that’s the expiration date.

Starting a Bitcoin Short Sale

We are still in the early days of shorting Bitcoin. Over the years, in-the-know investors have found creative ways to profit short of Bitcoin.

But with futures contacts coming from well-known institutions CME Group Inc., Cboe Global Markets, and Nasdaq Inc., it’s getting easier to short cryptocurrencies. That means you can make money betting on the downside, which many bear market watchers say is unavoidable.

With volatility, you don’t have to wait for a full bubble burst to make a profit. You can benefit from relatively small drops in value, as well as more extreme fluctuations in Bitcoin’s value.

As with any investment, learning how to sell short Bitcoins is no easy feat. It takes research and a willingness to take risks. Most financial advisors would equate it with gambling … but if you play your cards right, you can get financial benefits.

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