Bitcoin Shorting 101: How Cryptocurrency Traders Can Short BTC In 2019
While HODLing is believed by many to be the best investment strategy when it comes to cryptocurrencies, in the trading sector, things are not as easy, especially when it comes to the bearish market. All those who decided to join the crypto space back in 2017, when the sector was dominated by the biggest rally ever seen in the crypto world, had to learn to adapt only months later after the bears struck.
The bearish market was active ever since, and in order to make a profit, traders had to turn to shorting, which is what we will discuss today.
What Is Shorting?
Simply put, shorting is a trading strategy where traders are betting on the asset's price going down. While this may serve as a simple explanation, in truth, it is a bit more complicated than that.
Let's take a step back from the crypto sector and take a look at how things work in the stock market. Shorting in the stock market means that you, as a trader, decided to get your broker to obtain stocks and immediately sell them on. Then, when you want to close the position, the stock is bought back. That way, you get a profit from the difference in prices, assuming that the price of stock continues to drop. If the opposite happens, and the stock price goes up, then traders who decided to take a short position experience losses.
This practice is pretty risky, as there is no telling how much the price might rise if things start turning unexpectedly.
Now, let's get back to the crypto world. The first thing to understand is that shorting is also possible when it comes to digital currencies, which is something that a lot of traders either forgot or they never even knew about it. In fact, this is a process that was quite popular for over a year now, which is how professional traders managed to make money ever since January 2018, when the crypto market crashed and prices dropped by as much as 80% or more in some coins' cases.
The usual way to complete shorting is via the derivative contracts. These are financial contracts with a determined price, which depends on the underlying instrument. However, when traders buy a derivative, it is not the same as if they bought the underlying asset. They are simply betting on its price. However, that does not mean that derivatives are limiting. In fact, they allow for some more advanced strategies that cannot be performed when traders simply hold an actual asset.
One such ability is applying leverage, which basically means that traders can get increased returns on their trades, but at a greater risk to lose their investment.
Liquidating Leveraged Positions
If traders decide to actually buy BTC, the purchased coin will remain in their possession no matter how the price ends up behaving. However, when it comes to derivatives, leveraged positions can be liquidated on a number of different exchanges, meaning that the traders may lose their investment if the price passes a certain, previously established border.
The same method is applied for shorting, although short positions can still be taken without applying leverage.
Where To Trade Crypto Derivatives
There are several crypto exchanges that offer derivatives trading, with the most popular one being BitMEX. However, it should be noted that BitMEX is not available for use in the US, although traders might bypass this restriction through the use of online privacy tools, such as VPNs.
The most popular product on the BitMEX exchange is XBTUSD perpetual swap, which is a derivative that tracks the price of BTC against the US dollar. BitMEX is also popular because it offers advanced trading methods, as well as up to 100x leverage. While this may bring massive returns, it also comes with a huge risk of losing your investment.
It should also be noted that BitMEX only deals with Bitcoin, so traders who use altcoins need to exchange them for BTC first.