How to Short-Sell Bitcoin
The cryptocurrency has seen a meteoric rise. Here's how to bet against it.
The cryptocurrency made a relatively unheralded entrance in the financial world when it was introduced in 2009. But its profile has risen steadily over the years as more and more people are becoming interested in this alternative form of currency.
Along with the increased interest in Bitcoin has been a rapidly increasing value. After spending much of the first half of 2017 hovering around $1,000, it hit $5,000 in October and breached $7,000 in early November.
Now, as of December 2017, it's hit a new record high, with one Bitcoin valued at $17,450.01 (as of December 14, 2017). (By the way, you should know that you don’t have to own whole Bitcoins to invest in this cryptocurrency. You can buy “fractions” or “percentages” of a Bitcoin.)
Boosters say Bitcoin could reach $25,000 within the next several years. More and more financial institutions are accepting Bitcoin. And it’s seen as a safe haven in a worldwide economy that is volatile, as Bitcoin not controlled by any government.
But despite the hype, the financial world is chomping at the bit to bet against Bitcoin. And they’ll soon have the opportunity. Bitcoin futures contracts are planned at CME Group Inc. (Chicago Mercantile Exchange), Cboe Global Markets Inc., and Nasdaq Inc. That makes it that much easier to bet against–or “short”–the cryptocurrency. The first two plan to introduce the contracts in mid-December, and Nasdaq will get its start in early 2018.
Once those futures contracts are available, hedge funds and other big investors are ready to pounce. Why? Many financial watchers say Bitcoin is the best shorting opportunity ever. Part of the reasoning is that after reaching $11,000 in value, the cryptocurrency dropped almost 20% in value within 90 minutes, to just over $9,000… Then reached over $11,000 again a few days.
There is opportunity in that volatility.
Are The Early “Glory Days” of Bitcoin Over?
Bitcoin has caught the notice of the mainstream financial press and the world’s biggest investors and major players in the investment world, not to mention everyday traders who have come to understand that trading in Bitcoin can be very lucrative.
One way to get in on the action is to buy Bitcoin and then hold on to it, waiting for it to increase in value. When it reaches a price you feel comfortable with, you can then sell it and then pocket the profit.
This was a more viable option many years ago, in the early days. In fact, many Bitcoin millionaires were born in the early days. Take Erik Finman, who started investing in Bitcoin when it was just $12. You do the math. Or take Barry Silbert, who bought 48,000 Bitcoins for $350 each in 2014 when the U.S. Marshals Service auctioned off the stash of Ross Ulbricht, the creator of the Dark Web site Silk Road.
To give you some perspective, if you had invested $1 in Bitcoin at the very beginning, it would be worth $1.4 million today. If you feel like you missed the boat with Bitcoin you can always invest in these other cryptocurrency alternatives to Bitcoin.
Is Bitcoin The Next "Big Short"?
That brings us to what many believe is going to be the next way to cash in big on the Bitcoin phenomenon: You can “short” the cryptocurrency. What goes up must come down, and you can actually profit when any investment, including Bitcoin, drops in value.
If you’re not familiar, shorting an investment is a relatively simple process–as far as the actual trading. It’s figuring out your investment play–and actually making a profit as the value of the investment goes up or down–that’s the tricky part.
Of course, as with any investment, you can’t just jump into the action uninformed and uneducated. But the great news is that you don’t have to be a pro. Anybody can learn how to short-sell Bitcoin to potentially profit.
With the price of Bitcoin continuing to be relatively volatile and many analysts claiming that its recent meteoric rise is unsustainable and a crash is imminent, the urgency to start trading and learning how to short-sell Bitcoin has never been more urgent.
Another factor to consider is that world governments are closely scrutinizing Bitcoin exchanges and investments in the cryptocurrency. Due to its anonymous nature, authorities are concerned about the tax avoidance possibilities.
Options for Short-Selling
With that said, here are some of the ways you can make a profit by betting against Bitcoin.
Direct Short Selling of Bitcoin
This is the simplest type of short selling Bitcoin: You sell off your existing Bitcoin at a price you are comfortable with. Your hope is that the value drops further; and then, if you so choose, you can buy Bitcoin again at a lower price.
Margin Trading of Bitcoin
Many people start short selling Bitcoin by using a margin trading platform dedicated to crypotcurrencies. With this type of trading you borrow money from a broker, make the 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.
Futures Trading of Bitcoin
You can also find ways to short sell Bitcoin in the futures market. Here’s how it works: a future is basically a contract. You, as the buyer, agree to buy Bitcoin at a future date at a certain fixed price. In this type of trading, you’re predicting – hoping – that the price of Bitcoin will go up. That way, when your contract expires you can buy Bitcoin below the market price.
Binary Options Trading of Bitcoin
Another way you can figure out how to short sell Bitcoin is with options trading, which involves “put” and “call” options.
With a put option contract, you have the right to sell a specified amount of Bitcoin, which you set, at a certain price at a certain time. This is called the strike price. The put option gains value as Bitcoin loses value compared to this strike price. Importantly, you are not obligated to sell the option if you don’t want to.
A call option contract gives 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 specific price until a certain date – that’s the expiration date.
Get Started Short-Selling Bitcoin
We’re still in the early days of shorting Bitcoin. For years, in-the-know investors have been coming up with creative ways to profit by shorting Bitcoin.
But with futures contacts coming from big name institutions CME Group Inc., Cboe Global Markets Inc., and Nasdaq Inc., it’s set to get even easier to short the cryptocurrency. That means you can make money by betting on its decline, which many bearish market watchers say is inevitable.
With the volatility you don’t have to wait for a full-on bubble burst to profit. You can benefit from even relatively small declines in value, as well as the more extreme fluctuations in Bitcoin's value.
As with any investment, learning how to short-sell Bitcoin is not a walk in the park. It takes research and some willingness to take risk. Most financial advisors would equate it with gambling... but if you play your cards right, you can benefit financially.