How to Short-Sell Bitcoin: 3 Ways To Go About It

There is currently a lot of speculations around "Bitcoin bubble." Many finance experts, bankers and traders do not believe in the bright future of cryptocurrencies. Partially, this is because of high volatility. At its peak in December 2017, Bitcoin price was around $20,000; later on February 2018, it was around $7,000. Now is fluctuating around $9,000.

With a traditional stock market, when investors do not believe in certain assets (e.g. stock), they can go short against it. While long deal means that investor buys a share with the expectation that its price will rise, short selling means that the investor borrows this stock from the broker to sell it in the hope that the price will drop down. The investor then buys the stock back, returns it to the lender and takes the profit from the difference between the sale price and the purchase price (if the price went up, the investor sees a loss).

For the cryptocurrency market, there are a number of ways to short crypto assets.

Futures Market

At the end of the 2017, two major stock exchanges, CME and Cboe, revealed their own future contracts. Futures are contracts describing conditions of the deal that will be made in future.

For example, a buyer of a futures contract agrees to buy Bitcoin at a future date at a certain fixed price.This means he is betting that the price will go up, and if so, he will be able to buy an asset below the current market price. However, this financial instrument could be used for short trading. If you sell a futures contract, this means you're hoping the price will drop down.

Margin Trading

Another option in Bitcoin short trading is margin trading via specialized crypto exchanges. In this case, traders borrow Bitcoin from a broker to make a deal, hoping that their bet pays off. If everything goes smoothly, the price drops down, the trader buys Bitcoin back at a lower price, returns the asset to the broker and keeps the profit. There are a number of crypto exchanges allowing margin trading, including AVAtrade, Cex.io and Plus500.

Options Trading

Futures and margin trading are not the only option of shorting cryptocurrencies. Call and put options also allow to do this. In the case of a short deal, you should use a put order. This means that you’d want to get the right (but not an obligation) to sell the currency at a certain price (strike price) at a certain time in future. Put option gains value if Bitcoin loses its value compared to the strike price.

Where to Get Bitcoin for Shorting

This is a very good question for everyone who is aiming at making big short deals with cryptocurrency. For now, there are not that many options — you can go to crypto exchanges and buy it, find specialized crypto brokers who will provide Bitcoins as a loan for margin trading or use futures at CME or Cboe.

One more option is P2P lending within the crypto community. The team of soon-to-launch Celsius project works on replacing these intermediaries with coin holders who loan their crypto asset to earn interest. This will help crypto funds and large financial institutions get crypto for shorting at a low rate.

Is Shorting Bitcoin a Good Idea?

You can easily find "expert opinions" supporting both bearish and bullish positions. Volatility, currently low acceptance as a currency by merchants, scaling problems and competition from Ethereum and other altcoins may be the reasons to go short.

With that said, top finance executives like JPMorgan Chase Chairman and CEO Jamie Dimon who said that if you’re “stupid” enough to buy Bitcoin, you’ll pay the price one day. Buffett partner Charlie Munger called Bitcoin “total insanity” and recommended to avoid it “like the plague.”

Another point of view is that cryptocurrency prices are going up and down due to a number of factors, but there is a real value in it. It’s a tool that may disrupt industries like banking and remittances in a very short time, making the whole world a better place. And lots of analysts now talk about a "bull reversal" of Bitcoin.

As always in investments, there is no absolutely right answer as to whether it is a good idea to short Bitcoin or not. The good thing is regardless of what you expect from the crypto market now, you have plenty of options both for going long and short.

Ron Harav is the CEO at Magellan Capital LTD; Daniel Leon is the COO of Celsius Network.