Investing in Bitcoin typically involves buying Bitcoin and HODLing on for dear life.
But with Bitcoin’s recent 60%+ drop in price, and crypto winter setting in, Bitcoin may not feel like an attractive investment right now.
But what if you could make money while Bitcoin dropped in price, instead of just waiting for it to go to the moon?
Short selling, or “shorting,” is a speculative investment strategy that profits from an asset falling in price. Bitcoin can fall in price dramatically in just a few days, making it one of the most popular assets to short.
You own shares of Apple, Amazon, Tesla. Why not Banksy or Andy Warhol? Their works’ value doesn’t rise and fall with the stock market. And they’re a lot cooler than Jeff Bezos.
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In this guide we will cover several ways to short Bitcoin, including where to invest.
Note: Short-selling is an advanced investment strategy, and is considered a speculative investment with a high risk profile. Make sure you understand the risks before shorting any asset.
How to Short Bitcoin
The process of shorting Bitcoin involves borrowing Bitcoin and selling it at today’s price, and then buying it back at a lower price, allowing you to pocket the difference.
There are several ways to short Bitcoin, some which are more complicated than others. Some of these options are not available to U.S. investors due to securities regulations.
1. Margin Trading
Margin trading is the process of borrowing funds from a cryptocurrency trading broker or exchange. Many crypto exchanges offer the ability to enter “short positions” on Bitcoin and borrow funds on margin to increase your position. Margin accounts also require you to deposit funds as collateral against your short-selling position, which can be sold by the exchange (liquidated) if the price of the asset goes up instead of down.
In the U.S., short-selling requires use of margin accounts due to Regulation T, a law put in place by the U.S. Federal Reserve. This ensures brokers and exchanges can safely lend margin to borrowers, with the ability to recoup any losses automatically.
2. Futures Trading
Futures trading involves entering into a contract agreement to purchase or sell an asset on a future date at a predetermined price. You can bet on Bitcoin going down in price by purchasing a contract that allows you to buy Bitcoin at a lower price in the future.
Futures contracts can also include leverage, with many crypto exchanges offering up to 100x leverage on trades. This allows traders to purchase 100 times more that their current collateral allows, which can amplify your gains but also your losses.
Futures trading is available on many crypto exchanges, such as Kraken, Binance, and FTX, but is not available to U.S. residents on most of them. Coinbase recently launched Nano Bitcoin Futures, which allows purchasing a futures contract for one-hundredth (0.01) of a Bitcoin and is available to U.S. residents. Bitcoin futures contracts are also available on stock-trading platforms such as eToro and TD Ameritrade.
3. Binary Options Trading
Options trading is a strategy that allows investors to purchase the right — but not the obligation — to buy or sell an asset on a specified date. Binary options are more specific; investors can purchase a contract based on a prediction in price.
For shorting Bitcoin, inventors would need to purchase a binary put option that predicts a fall in price. For example, if an investor believes Bitcoin will be below $20,000 on a specific date, they can purchase a binary put option with a $20,000 strike price. If correct, the traders will receive a payout (typically set by the broker as part of the contract). If Bitcoin is still above $20,000 by the expiration date of the contract, the investor will lose the premium they paid for the contract.
Binary options are typically not available to U.S. investors and are handled by overseas brokers that may charge high fees. Any unregulated markets carry much higher risk and may be illegal for U.S. investors to take part in.
4. Bitcoin Contracts for Differences (CFDs)
A contract for difference (CFD) is an investment contract that pays out the difference between the opening and closing prices of an asset. Bitcoin CFDs allow investors to purchase a contract based on a prediction that Bitcoin’s price will drop, effectively shorting Bitcoin.
For example, if you purchase a one-week short CFD with an opening Bitcoin price of $21,000 and a week later, upon closing, the price of Bitcoin is at $20,000, you’d profit from the drop in price. If the price increases, you’ll lose money on the investment.
CFDs, similar to options contracts, typically purchase large quantities of an asset but only require investors to put down a smaller amount to purchase the contract, such as 10% of the total investment. This is considered a leveraged position because the investor is only putting up a fraction of the collateral needed to purchase the assets in the CFD.
Bitcoin CFDs are available through online brokerages such as eToro or Plus500. CFDs are considered a type of derivative investment and typically are not available to U.S. investors.
5. Prediction Markets
Bitcoin prediction markets are similar to other wager-based financial markets, such as sports betting, allowing investors to place wagers based on a prediction about Bitcoin’s price. Inventors who predict Bitcoin’s price will go down are essentially short-selling BTC.
Some of the popular prediction market applications include Augur and Polymarket. The international FTX exchange also offers some prediction markets, although it is restricted in many countries. As with other derivatives trading markets, prediction markets typically are not available to U.S. investors.
6. Inverse Bitcoin Exchange-Traded Products
Investing in exchange-traded funds (ETFs) is easy, and you can access them at any popular online brokerage. But if you have ever wanted to bet against a certain ETF, you would want to invest in an inverse ETF. These ETFs, also known as short ETFs, are a collection of derivatives products that make money when the price of an asset goes down.
There are only a few ETFs available to short Bitcoin, with only one available to U.S. investors. The ProShares Short Bitcoin Strategy ETF (BITI) is available on most brokerages, such as Vanguard, Fidelity, and TD Ameritrade. It is inversely correlated with the S&P CME Bitcoin Futures Index. It does come with a high expense ratio (around 0.95%) and is designed to track the daily change in Bitcoin price fluctuations, compounding your returns (or losses).
7. Short-Sell Bitcoin (BTC) Assets
One of the simplest ways to short-sell Bitcoin is to sell Bitcoin you already own on an exchange, wait for the price to drop, and then buy it back at a lower price.
Although this is a risky strategy, it is far less complicated than other short-selling methods. There are also ways to short-sell your Bitcoin on a crypto exchange, and even leverage your short position, thereby amplifying your gains (or losses).
If the price of Bitcoin goes up in value, you may be stuck paying a higher price for Bitcoin to repurchase it. In the case of using your Bitcoin as collateral on a crypto exchange, you may lose your Bitcoin altogether if your short position gets liquidated.
Short-selling is a sophisticated trading strategy that is used by professional traders and hedge funds to protect their investments in the case of a market downturn. Shorting Bitcoin has become extremely popular as of late, especially in light of the massive drop in price in 2022.
If you are a U.S. investor looking to short-sell Bitcoin, probably the easiest method is to purchase the ProShares Short Bitcoin ETF in your favorite brokerage account. Just be aware of the nearly 1% expense ratio, which is rather high.
And keep in mind that shorting Bitcoin comes with massive risk, including the risk of losing all of your money in the trade. With the unpredictability of the cryptocurrency market, as well as the added risk of using leverage, short-selling can be a fast way to lose a lot of money.