How to Short Bitcoin: Short Bitcoin Trading Guide

1

Sign up to Bybit or Phemex

First you’ll need to sign up to Bybit or Phemex, which are industry household exchanges for derivative trading. Once you sign up, you need to deposit capital either in bitcoin or USD to begin trading. You can also use your signup bonus for a free trade!

2

Spot a Bitcoin short opportunity

Blindly shorting bitcoin or any other financial instrument is not a great idea. To short bitcoin, you need to identify weakness in buying pressure. Various tools are available to gauge a potential short opportunity, and this is important if you want to short bitcoin on leverage.

3

Sell or short Bitcoin!

Once the first two steps are completed you are ready to short bitcoin. Select your desired leverage, entry & exit positions and don’t forget to put a stop loss just in case the trade turns against you. You can now short bitcoin and play against the price!

Do you need to know how to short bitcoin? For those investors who believe that bitcoin is going to crash in the future, shorting bitcoin on Bybit or Phemex could be a good option, and this guide will show you how to do this.

Indeed, even in a bull run bitcoin price volatility is very high, with the coin historically fluctuating up to 40% during corrective periods within a bull trend. Sharp moves up or down open up these trading opportunities, which you could take advantage of on margin trading platforms.

Yes, you can short bitcoin on Bybit or Phemex if the opportunity presents itself. In this tutorial, we’ll walk you through the process.

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What does ‘shorting ’ mean?

Short selling is an investment style that makes money as an asset’s price drops. The bitcoin price tends to be very volatile, providing many opportunities to both long and short it.

One of the easiest ways to short bitcoin is through a cryptocurrency margin trading platform. Many exchanges and brokerages allow this type of trading, allowing investors to ‘borrow’ money from a broker in order to execute a trade. 

How does a Bitcoin short work?

In simple terms, shorting bitcoin allows you to borrow an asset or financial instrument such as bitcoin and sell it at its current price. With perpetual futures contracts like those available on Bybit and Phemex, you’ll then pay back the person you borrowed from at a later date and rake in the difference.

Of course, in order for this to be a profitable trade, bitcoin’s price will have to drop after you short it. This means that it will be cheaper to pay back the person you borrowed from.

To illustrate this point, consider this example:

You short 2 bitcoin when the price is $18,000.

This means you’ve borrowed 2 bitcoins to sell them for $36,000.

The bitcoin price then drops to $17,000 and you close your position. This is done by repurchasing the 2 bitcoin you borrowed at a lower price ($17,000 * 2 = $ 34,000).

As such, your profit is $36,000 – $34,000 = $2,000.

On exchanges like ByBit and Phemex, you can even leverage your short trade up to 100x. This increases the risk proportionally while also increasing the prospective rewards or losses. Check out the Bitcoinsensus ‘how to trade bitcoin’ guide for more info!

What are perpetual contracts?

A perpetual swap contract, also referred to as a ‘futures’ contract is a virtual derivative product that is settled in digital tokens such as bitcoin. Each swap contract has a face value of 100 USD. Using these financial products on Bybit or on Phemex, traders can long and short a financial instrument such as bitcoin in order to profit from the asset’s price-rise or price decline. 

As you might imagine, a perpetual contract has no expiry date. Instead, funding is used to make sure the perpetual price is anchored to the spot market. Mark price is used to calculate a users’ unrealized profits and losses (UPL) in order to reduce unnecessary liquidation in volatile market conditions which are sure to come.

Both Bybit and Phemex are highly liquid exchanges which allow you to short and long bitcoin in the derivatives market.

If you’re skeptical about these exchanges, check out the Bybit review and Phemex review for detailed information on trading safety!

How to short sell Bitcoin

To execute the sell order, you need to contact a trading agency or platform such as ByBit, Phemex or Bitfinex (for US users).

If you sell the above 2 bitcoins, you will eventually have to ‘cover’ those 2 bitcoins irrespective of bitcoin’s price. If the price increases, then it will be more expensive and you will have to pay more in order to close the contract. When short-selling, the firm that loaned the bitcoin to you can also recall the loan on short notice. This does not close your contract, but the ‘funding rate’ to maintain the short position may vary depending on market conditions.

Since you will borrow bitcoin or US Dollars to conduct a transaction, you’ll have to pay what is called a ‘funding fee’ to the lender. Otherwise there would be no incentives for lenders and no market.

Manage risk when shorting bitcoin

It’s important to take note of any rules when short-selling. Otherwise, since prices can increase rapidly, this could leave your short trade ‘underwater’. In this case, an underwater position is a position that has an unrealised loss i.e. bitcoin’s price goes above your entry price.

Typically, traders use a stop-loss function when longing or shorting bitcoin. This ensures a cut-off point in the event that a trade doesn’t go your way. While some people debate the ethics of shorting a market, the practice is very common with stocks and bitcoin trading platforms.

Shorting using a Bitcoin derivatives exchange

Bitcoin exchanges such as Bybit and Phemex offer a wide variety of financial products for professional traders. Some allow leveraged shorting as well. Simply put, leveraged shorting means that you are able to borrow more money than you own in order to execute a trade. 

For example, if you want to sell bitcoin on a 1:3 ratio with $1000, then the exchange would allow you to borrow the additional funds in order to conduct the trade. Your short sell order is now three times higher ($3000), and is taken out against your own capital. This creates a ‘liquidation price’, where your position could be forcibly liquidated if the trade does not go as intended.

Typically, traders use a variety of risk-management techniques in order to mitigate potential losses while maximising returns or at least break-even.

Since leverage trading magnifies both the potential gains and losses, it is considered extremely risky and is normally not recommended for novice traders and investors.

Short in three simple steps

1. Sign up and deposit bitcoin on Bybit or Phemex

Without further ado, here are the three simple steps you need to sell bitcoin on Bybit: First, you’ll need to sign up to Bybit or Phemex in order to access bitcoin and crypto trading products.

Signing up is incredibly easy. Sign up with your email address and create a strong password to access bitcoin leveraged trading products.

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bybit deposit crypto bitcoinsensus

Then, you need to fund your account. To do this, scroll over your username, click ‘my assets’ and you’ll see the above screen. Click ‘deposit’ on the bitcoin section, and send bitcoin to your Bybit trading account.

You’re now one step closer to shorting bitcoin!

2. Spot a bitcoin shorting opportunity

Navigate to ‘trade’ tab, click ‘BTCUSD’ under the Perpetual Contracts section and you are now in the Bybit trading terminal. This opens up the below user interface which is the main trading terminal.

bybit trading terminal bitcoinsensus

Once the terminal is open, there are several trading tools you can use to deduce the price of BTC in a given time frame.

These technical tools normally include the Relative Strength Index (RSI) indicator, the Moving Average Convergence Divergence (MACD) indicator and others. 

Traders typically like to tinker with these tools and adapt them to a particular trading style. Since this is a shorting guide, then the bias assumes that bitcoin will trade at lower prices in the future.

3. Target locked – execute order 66!

Then, you can define the parameters of your short position. To learn more about this, check out the Bitcoinsensus Bybit trading tutorial here. Now that everything is in place, you’re ready to execute your first bitcoin short order.

Is shorting bitcoin risky?

bybit buy/sell

Short selling any asset is a high-risk venture by definition. Normally, when you invest in an asset your losses are limited to the amount that you invested in the asset.

So, if for instance you put $10,000 dollars in bitcoin, and it suddenly collapsed and became worthless, then your potential losses would be limited to $10,000.

However, when short selling, your losses could extend well beyond your initial investment. This is true even when using Bybit or Phemex. The 3:1 ratio (3x) short mentioned before could extend losses well beyond what you put into the trade, which could liquidate your entire portfolio if not managed carefully.

In fact, since this is such a high-risk financial opportunity that you should only short if you’re confident in your trading strategy. Given the potential downsides, it’s even more important to be confident when shorting bitcoin, especially on leverage. Both Bybit and Phemex allow users to leverage trade at institutional levels with up to 100x leverage capabilities.

The higher the leverage, the higher the risk.

Should you short bitcoin?

Bitcoin is perhaps the greatest technological innovation in money since the discovery of gold. However, the global market is not yet sold on this idea and this is reflected in its volatility and big price swings.

As the market understands, learns and figures things out, traders on either side will find opportunities to both long and short bitcoin. Shorting in the long-term hasn’t gone very well for anyone, given the coin’s history of surging price-action. However, volatile moves to the downside happen quite frequently, presenting an opportunity for financial gain.

Those who just started trading should probably avoid leveraged trading until they’re more experienced with crypto markets.

What makes a good short strategy?

Trading strategies are subject to debate, and every trader will give you a unique answer to this question. However, market cycles tend to ring with this ancient truism: “price takes the stairs up but the lift down”.

chrisoncrypto bitcoinsensus

Often times, the same can be said of bitcoin. Some trading strategies include various indicators in order to find confluence for a trade setup. The above strategy is simple and used by many market participants to find long and short trading opportunities.

In this particular example, bitcoin went into a bearish trend when it broke below the 20-EMA on the daily chart in late February. The warning signs for a potential sell-off came before, however, which could be seen on the Relative Strength Index (RSI) indicator. When the RSI is above the 70-line, the price is said to be in ‘overbought’ territory, opening the door to a possible ‘short’ trade. On the flip side, if the RSI is below the 30-line, price is said to be ‘oversold’, opening the door to a possible ‘long’ trade.

Once the bitcoin price moved below the 20-daily EMA in the above example, then some traders saw this as a confirmation to sell. In this example, the inverse is true in case there is a ‘long’ opportunity, which presented itself in April.

At the time of writing, bitcoin is trading in a parabolic trend, which brings us to the above truism. Ultimately, what goes up must come down at some point, at least in relative terms.

Having said that, bitcoin price predictions into next year far exceed $20,000. Indeed, the possibilities for bitcoin are incredible and opportunities to short and long come along as the price continues onwards to astronomical prices.

The bottom line

The shorting game is considered by many to be a very effective strategy for profiting off the cryptocurrency. At the same time, it’s also a great way to lose your cryptocurrency if done carelessly and is much riskier than investing in the long-term or averaging in.

If conditions are favourable, shorting could rake in profits upwards of 50% in a short amount of time. However, the amount of profit or loss depends not only on the accuracy of a trader’s plans, but more on the risk-management style deployed.

Regardless, only experienced traders should consider shorting with large amounts. If successful, shorting could produce life-changing money in a relatively short timeframe. Given that this is not your typical financial instrument, it cannot be understated that shorting bitcoin could be great for short-term trading, but not so much for the long-run. After all, bitcoin has increased upwards of 9 million percent since its inception. There’s no reason why it should increase another 9 million given the bitcoin value proposition.