Many people have made money shorting Bitcoin, and then they post it on social media or their blog leading others to wonder how they too can make money by shorting Bitcoin.
In this article, we are going to give you step by step instructions for shorting Bitcoin. But be aware, shorting Bitcoin, or any type of stock or cryptocurrency, is extremely risky and most people lose money rather than making it. Basically, proceed at your own risk.
What Does it Mean to Short a Stock?
Before going into the details about how to short Bitcoin, it’s important that you know what shorting is. While common in the cryptocurrency world, it is a trading tactic that is used on Wall Street for trading stocks as well. If you want to watch a movie about a stock shorting, The Big Short discusses one incident of shorting a stock when the individual came out on top during the 2008 crash.
Shorting a stock is when you decide that you want to purchase stock (or in this case Bitcoin) but you have a feeling that it will decline in price soon. In order to take advantage of this, you will effectively “borrow” the stock from a broker, agreeing to pay them back at a later date. In the meantime, you sell the stock and hope the price will fall.
This way, when the date comes for you to pay back your broker, you can buy the stock back at a cheaper price. The difference between what you spent to buy the stock back, and what you originally sold the borrowed stock for is your profit.
Here’s an example on a very small scale. You borrow one Bitcoin from your broker and immediately sell it for $600. (It’s 2015 in this example). Then, three months later, when your contract expires with the broker and you need to pay your stock back, you look to see the price of Bitcoin has fallen to $450. You buy one $450 Bitcoin and return it to your broker, having made $150 in profit.
While this may seem easy, there is no guarantee the price of a specific commodity or cryptocurrency will decline. When you short a stock, know that you are effectively gambling on the fact that prices will decrease in the future. Shorting a stock is very risky.
How to Short Bitcoin
If you have made it this far, and you are ready to risk it all to short Bitcoin, here is how you do it.
1. Get an Account on a Brokerage Platform
First and foremost, you need someone who will lend you Bitcoin to sell for your short. This is a bit more difficult to find in the cryptocurrency world than in the fiat world. Many cryptocurrency exchanges, however, do offer this feature.
Before you deposit your hard earned money, ensure you check an exchange and trust that they are not a scam. You also may want to consider DEFI versus CEFI options based on regulations. Some popular and trustworthy platforms as of the writing of this article are Binance and Kraken.
2. Lock Money in a Smart Contract
To effectively short Bitcoin, you will need to lock money into a smart contract to get the Bitcoins you will sell to short. Know that these smart contracts require hefty deposits in order to guarantee they will get your return the Bitcoins you are borrowing.
3. Sell the Bitcoin
Sell the Bitcoin your received from the smart contract.
Wait and hope that the price goes down so that you can buy back Bitcoin and return it to the smart contract before it expires. If the price goes up, you will end up losing money.
Also know that DEFI is not like the normal world. If you miss your smart contract deadline by even one minute the funds are typically liquidated as these contracts are automatic and not controlled by humans. This means you must very prompt when working with these types of shorts.
5. Possibly Profit
Maybe you made a profit, maybe you didn’t. But now you understand how shorting works!
Editor’s Note: You can also short Bitcoin without having to use a smart contract. All you do is buy Bitcoin, sell it, then save the money in hopes Bitcoin will fall in price later and you can buy it back at a lower cost. This is a slightly less risky version of shorting.
Making Bitcoin in Predictions Markets
Another way to short Bitcoin is to find a site that has predictions markets. In a predictions markets, investors can choose events they want to bet on. If another investor takes them up on it, the bet is set and the investors wait for the outcome to see who wins.
While predictions markets may be fun, this is straight up Bitcoin gambling. But, if you want to try your luck at guessing when Bitcoin will fall in price and by how much, this is a great way to do it. Note that these are also run by smart contracts and usually require a full deposit of the bet up front.
Better Ways to Use Bitcoin
As you can see, shorting Bitcoin is extremely risky. If you aren’t ready to take that type of risk on Bitcoin, that’s okay, as there are many other things you can invest in instead. For example, MintDice.com is an online casino which allows users to invest in the house bankroll. While this still carries risk, it is much less risk than an attempted short.
You can also simply hold your Bitcoins, which is the investment strategy that most people choose. While there is no guarantee Bitcoin will stay the same price, at least you will always have the same amount of Bitcoin at your disposal.
Overall, shorting Bitcoin is easy, as long as you have an account on a cryptocurrency exchange that offers the features to do so. But while it may be easy, it is extremely risky. It is not recommended to short Bitcoin unless you have experience in the trading world and are truly prepared to lose your entire investment and then some.