How to Short Bitcoin in 3 Simple Steps

Bitcoin has been around for over a decade, but it only caught the world’s attention when its value skyrocketed to around $20,000 per BTC in late 2017. Some thought cryptocurrencies would take over fiat currencies, while others thought Bitcoin was just the latest bubble.

Yet, because of the peculiar nature of the cryptocurrency, short-selling in the traditional sense was historically not possible. Fundamental crypto-bears and speculators watched Bitcoin fall almost 75% in 2018 with few formal ways to bet against it.

Today, many online brokers offer different ways to short major cryptocurrencies. In this guide, we teach you how to short bitcoin and also review some of the best cryptocurrency brokers on whose platforms you can short bitcoin and other cryptos:

Our 3-step guide to shorting Bitcoin:

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Step 1: Choose a broker that allows you to short Bitcoin

Step 2: Learn how to short Bitcoin

How does short-selling work?

Short-selling is the practice of borrowing an asset, selling it, and waiting for it to lose value before repurchasing it and giving it back to the lender. It is widely used in the stock market to profit from temporary or permanent declines in asset prices.

While some see them as pure speculators, short-sellers play a crucial role in the financial markets. When asset prices increase beyond their fundamental value, short-selling can exert downward pressure and bring prices back in line. Short-selling is a powerful tool to contain bubbles, punish poor or fraudulent managers, and protect capital in a bear market. For more on this, review our detailed guide on How to Short Stocks.

What can cause the price of Bitcoin to decline?

Like any other asset, the price of Bitcoin is a function of supply and demand.

At its core, the number of Bitcoins that can be mined is finite, and every day fewer Bitcoins are mined. If demand stays constant, as more Bitcoins come into existence, prices should naturally fall.

However, the relevant “supply” of Bitcoin is not the number of coins in existence but the number of coins people are selling in exchange for another currency (say, the US dollar). Similarly, the “demand” for Bitcoin is the number of people selling their dollars to buy Bitcoins.

To understand what can make the price of Bitcoin fall, you need to find what can lead to more supply or less demand. Let’s consider some examples:

1. Regulatory fears. When China decided to crack the whip on mining, or when regulators around the world said they considered restrictions on cryptocurrencies, the price of Bitcoin reacted negatively. More generally, serious regulatory actions (bans, limits, crackdowns on exchanges) can hurt the price of Bitcoin.
2. Large-scale fraud. Reports of major hacks and large-scale Bitcoin thefts can simultaneously scare off buyers and trigger panic selling, hitting the price of Bitcoin hard.
3. Bitcoin exchange failures. The best Bitcoin exchanges are not sheltered from risks and are vulnerable to fraud, poor management, or insolvency. When major exchanges fail, such as Mt. Gox in 2014, it can trigger a decline in the price of Bitcoin and other cryptocurrencies.
4. Hard forks. The creation of Bitcoin Cash in 2017 led to a slew of crypto-enthusiasts switching from BTC to BCH, with a temporary negative price impact on BTC.  Hard forks (major changes in technology) can, therefore, negatively affect the price of Bitcoin.
5. Movements in the first coins mined by Satoshi Nakamoto. Most Bitcoin enthusiasts will know about the million or so Bitcoins mined by the mysterious Satoshi Nakamoto. While the “father of Bitcoin” has remained dormant, his Bitcoin holdings are so large that he could severely hurt BTC’s price should he one day decide to sell in large chunks. This is obviously speculative, but neatly illustrates the dynamics of supply and demand.
6. Panic & “dash for cash”. When markets are collapsing and investors are running for the hills, Bitcoin may not be immune to large-scale selloffs. The recent coronavirus crisis is a testament to Bitcoins’ vulnerability to contagion from the global financial markets.

What are the main ways to short Bitcoin?

Unlike other assets, Bitcoin prices can be extremely volatile, which offers traders as much opportunities on the upside as on the downside, short-selling BTC is risky but can be very profitable.

Traditional short-selling (borrowing, selling and repurchasing) is very difficult for Bitcoin. If you want to do it, you will need to resort to derivatives, such as CFDs, ETNs, Futures, and Options.

Shorting Bitcoin via CFDs

Contracts-For-Difference (CFDs) are derivative products that allow you to “bet” against the broker on the direction of an asset’s price. Neither the broker nor you effectively own the asset. You simply try to anticipate its price movement. For more on this, learn how to trade CFDs with our dedicated guide.

Trading Bitcoin via CFDs is simple, intuitive, and a lot of online brokers allow it. Unlike other derivatives, CFDs are easy to understand and are more accessible to retail traders. Since no assets change hands, you do not need a crypto wallet or to worry about hacks on many crypto exchanges.

When you enter a “Sell” (short) Bitcoin order via CFD, you effectively bet the cryptocurrency broker that the price of BTC will decrease. For you to make money, you need a large enough drop in prices to offset your costs.

As for the fee structure, the broker typically charges a bid-ask spread (the difference between the buying and selling price) and daily fees to roll-over your position. These daily fees (<10 bps) tend to be lower for short positions, primarily because of the tendency of asset prices to move up in the long run.

Let us take a simple example:

• Day 1 (BTC trades at $5,000): You decide to short 1 Bitcoin. The bid (price at which you “sell” to your broker) is $4,950. You pay a daily fee: $2.
• Day 2 (BTC trades at $5,100): Your trade is losing, but you decide to wait. You pay a daily fee: $2.
• Day 3 (BTC trades at $4,850): Your trade is winning, and you decide to close it. The ask (price at which you “buy” back from your broker) is $4,900.

You sold at $4,950 and bought back at $4,900. Your trade rolled over to the next day twice, so you paid $4 in fees. Your net profit is thus $46 (~1% of your position).

Shorting Bitcoin’s Exchange-Traded Notes

Exchange-Traded Notes (ETNs) are similar to Exchange-Traded Funds (ETFs) with a few key differences. ETFs are listed funds that hold stakes in companies and that sell shares of the fund to the public on an exchange (similar to stocks). By contrast, ETNs are structured products in the form of senior debt notes (similar to bonds). To learn more, consult our Best ETFs Brokers guide and our guide on Bond Investing.

Several ETNs on various exchanges allow you to indirectly trade on the price of BTC. For example, the Bitcoin XBTE ETN listed on the NASDAQ OMX Nordic may be accessible to buy or short via a traditional broker. Note, however, that ETNs can be complicated products. make sure you thoroughly understand them before taking this approach.

Trading Bitcoin Options & Futures

Lastly, another way to short Bitcoin is to trade options or futures, two types of derivative products available on select stock exchanges. In the U.S., the Chicago Mercantile Exchange and the Chicago Board Options Exchange offer a range of BTC futures and put options for BTC bears. Other platforms, such as Deribit, offer a variety of Bitcoin derivatives to trade. In Europe, it is harder to access these products.

Futures and Options are risky products and may not be suited to retail investors. To learn how to trade them, consult our Options Trading guide and our review of the Best Futures Brokers.

Step 3: Set up your account and start trading

Now that you chose a broker and understood how to short Bitcoin, let’s look at how you can place your first trade. We will use the popular eToro trading platform as a reference.

The first step is to sign up. To create an account, start by providing basic information and a valid phone number.

 

eToro will then ask you several questions to complete the registration. First, you will have to provide your address & occupation and answer questions about your sources of income. Then, you will get a series of questions about your attitude toward risk, your investment style, and your trading experience.

Once you finish the questionnaire, you can start trading. To access the full potential of the platform, you will, however, have to submit a few more documents (e.g. proof of identity).

Let’s now see how to place your first trade. Short-selling is risky, so you should not start using your own money until you are fully confident with the process. We will start with eToro’s free demo account.

One you log in, select “Virtual” on the top left of the trading platform. You are now using the demo account.

Using the search function, look up Bitcoin and click “Trade”. Once you select “Sell”, you are automatically trading via a CFD.

You can then select the dollar or unit amount to sell, the amount of leverage, and the additional options (e.g. order type). The price on the top left is eToro’s quoted bid (“sell”) price.

Practice trading on their demo account and go long & short on different trades before you fund your account and start trading!

The Bottom Line

In this guide, we explained how short-selling Bitcoin works and how to get started with the right broker.

Shorting Bitcoin is not easy and carries some risks, but it can be very profitable if done correctly. The key is not just to calculate the price drop you need to cover the fees and make a profit, but to get the timing right. Good luck and happy trading!

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