Shorting Bitcoin is an essential concept to be mindful of for every person who steps into the crypto space. Whether you are looking to buy Bitcoin or trade it, it is helpful that you are familiar with other positive options as well such as shorting or short selling.
The crypto space is comprised of intricate details and ways of investing and trading that allow the users to enjoy the benefits in more than one way. However, before you begin crypto investing or trading you should know that the benefits are never guaranteed and entirely depend on how a trade goes.
However, if you are not so optimistic about the long-term price surge and significance of the crypto king then shorting BTC may be a suitable option for you. If you want to know “can I short Bitcoin?” and other relevant information about the concept then you need to know the information mentioned below.
What Is Meant by Shorting Bitcoin?
Shorting or short selling is an investment style followed by people who are not so sure about the long-term value maintenance of a digital asset, which is Bitcoin in this case. With the help of this investment style, the investors can get some sort of profit when the price of BTC drops.
Since, the prices of all digital currencies, including Bitcoin, are known to be volatile, this investment style presents a lot of opportunities of profit to the investors. Due to the unpredictability of BTC’s price, investors can not only short but long it as well.
If you want to know “can I short Bitcoin?” then you first need to be familiar with other details of the concept that are discussed further below.
How Does Shorting Work?
As a new investor, interested in shorting Bitcoin, you first need to understand how it works. Short selling Bitcoin basically allows investors to borrow a financial instrument or a cryptocurrency, such as BTC, and sell it at its current price.
This trade can only be beneficial for the short sellers if the price of BTC drops after the investors short sell it. People who opt for shorting can also avail perpetual futures contracts and pay back the person they borrowed the asset from at a later date and time. If the price of BTC drops after you short it, it can be easier to pay back the person you borrow the funds from in the first place.
Example of Short Selling BTC
One of the best ways to understand a concept such as shorting Bitcoin is to take a look at an example of how it works.
Let us suppose that the price of BTC is $20,000 and as a short seller you short 2 BTC. This would mean that you have borrowed 2 BTC and will sell them at $40,000.
Now let us suppose that the price of BTC falls to $19,000 and you have to close your position. This will be done if you re-buy the 2 BTC you initially borrowed at a lower price, which would be $38,000.
According to this, your profit will be $40,000 – $38,000 = $2,000.
Is Short Selling Risky?
If you want to know “can I short Bitcoin?” then you should also be wary of the risks posed by short selling BTC. As a new crypto investor or trader you are likely to come across numerous risks because of the volatility associated with the crypto space.
Similarly, shorting Bitcoin can cause you to lose more than you can afford, which is why you should be careful. If you normally invest in BTC and the price drops, you will only be subjected to losing the amount that you invested.
However, depending on how much ratio you short sell, you will lose more than your initial investment. Short selling BTC is highly risky and as a new enthusiast you need to be careful of how much you short sell.
Risk Management Tips
Losing funds should be expected when you start trading crypto. Since the markets are volatile anything can happen at any moment and you can end up facing some losses. However, to limit the risks of something like that happening and to manage the risks efficiently, you should know and follow some tips.
Similarly, if you are interested in shorting Bitcoin then one of the tips you need to know for managing risks is using the stop-loss function. This advanced function ensures that there is a cut-off point that is triggered if the trade does not go well for you. This will limit the losses you face.
Shorting Bitcoin is an interesting venture, however, it comes with some risks as well that people need to know about. New BTC enthusiasts should generally not sign up for something like short selling without having proper information first. Therefore, if you are new to the crypto space and want to short sell BTC then you need to have the above-mentioned information first.