If you are a BTC enthusiast then one of several concepts you need to know about is shorting Bitcoin. This is a good opportunity for people to still be able to make some benefits, even if they do not believe in the long-term value of a digital asset, which is Bitcoin in this case.
The crypto market is known to be quite volatile and the prices of the digital assets are known to fluctuate for several reasons and sometimes quite unexpectedly. Shorting BTC allows the enthusiasts to have an opportunity where they can still get some profits, even if the price of the crypto king keeps fluctuating.
More details about the concept are mentioned below that will help you answer, ‘can I short Bitcoin?’ which is an important question to ask before you begin.
What is Meant by Shorting Bitcoin?
Shorting or short selling is an investment style that is mostly opted for by people who believe that the price of an asset will fall in the future. Keeping this in mind, enthusiasts make the most from the decline of an asset’s price.
Since Bitcoin is known to have a lot of volatility associated with it, it provides several opportunities for people to both long and short the crypto king.
In this article, you will learn more about what shorting means, how it works and can you benefit from it or not.
How Shorting Works?
If you want to know ‘can I short Bitcoin?’ then you first need to get a good understanding of how it all works. Knowing the mechanism first is important as it can help you determine how suitable or beneficial a strategy can be for you.
To put it simply, shorting Bitcoin allows the enthusiasts to borrow the digital currency from a lender and sell it at its current price.
If you opt for perpetual futures contracts you will be able to pay back the lender at a later date and time. However, paying back the lender can be easier and cheaper if you have a profitable trade, which is possible if the price of Bitcoin drops after you short sell it.
Example of Short Selling Bitcoin
Considering an example is one of the best ways to get an in-depth understanding of complex concepts such as shorting Bitcoin.
Let us suppose that you are a short seller and you short 2 BTC. Now when you short the crypto king the price of the flagship crypto asset is $19,000.
This would mean that the two BTC you have borrowed will be sold at the price of $38,000.
Now let us suppose that the price of the crypto king drops to $18,000 and you have to close your position. This would be possible if you purchase the 2 borrowed BTC again at the price of $36,000.
Considering the numbers mentioned above, your profit would be $38,000 – $36,000 = $2,000.
Risks of Short Selling BTC
If you want to know ‘can I short Bitcoin?’ then you also need to know the risks it poses. The crypto market is a volatile place and short selling BTC or any other crypto asset can be risky.
The risks come because normally if you invest in an asset and the price drops you only lose as much as you invest in it. With shorting Bitcoin the losses can go beyond what you invest.
The amount you lose while short selling BTC depends on the shorting ratio that you opt for. The higher the leverage or ratio you choose, the higher you risks and losses will be.
Therefore, you need to be careful while shorting BTC and move slowly in terms of the shorting ratio you choose.
How to Manage Risks?
Before you start shorting Bitcoin, it is crucial that you also learn about ways to minimize your risks and tackle them more efficiently. If you do not pay attention to helpful tips, you can face massive losses if the price of the crypto king surges unexpectedly.
Therefore, one of the ways, short traders often limit their losses is by using the stop-loss function, whether they long BTC or short it.
This function ensures that there is a cut-off point implemented automatically in case the trade is not going in your favor. This prevents you from facing more losses than you can afford.
Three Steps to Short Sell BTC
If you are interested in shorting Bitcoin then you need to know and follow the three simple steps that are mentioned below.
- Sign up with a popular and suitable exchange and deposit your BTC
- Keep an eye out for opportunities to short sell BTC
- Execute the order
Shorting Bitcoin is an exciting but risky venture, with several details you need to know as a beginner. To avoid unnecessary risks and loses you need to have as much information as possible about a concept before you begin. Similarly, if you are interesting in short selling BTC, you should have the information mentioned above first.