Shorting Bitcoin is an interesting and somewhat complex concept that should be known by everyone who joins the crypto space. Bitcoin enthusiasts need to know about different operations being carried out in the industry. The more they are aware of, the more efficiently they can form their investing and trading plans.
Before you start buying or trading BTC or any other crypto asset, it is important for you to know what shorting is. All the important details of the complex concept are mentioned below.
If you know what shorting is and how it can benefit you then knowing how or when to invest in Bitcoin can be easier.
Here is what you need to know to determine ‘can I short Bitcoin?”.
Understanding What Shorting Bitcoin Is
Shorting or short selling is an investment style. It is mostly opted by people who are not positive about the price surge of Bitcoin in the long-run. By opting for this investment style, the crypto investors can benefit when the price of the crypto king drops.
Before you begin, it is important to note that the profits are never guaranteed and depend on several factors.
However, since there is a lot of volatility associated with the price of Bitcoin, there are several opportunities for people to buy and short the flagship cryptocurrency.
After understanding the basic idea of shorting BTC, you should now explore more details, such as how it works, how you can short and more.
How it Works?
Shorting Bitcoin is basically a process that allows BTC enthusiasts to borrow a financial instrument or an asset (Bitcoin in this case) and sell it at its current price. If you opt for the perpetual futures contracts offered by some exchanges, you can pay the person, who you borrow BTC from, at a later time and date.
However, if you want to pay back the person you borrowed the asset from to be less financially burdening then you need to have a profitable trade. This is possible if the price of BTC drops after you short it.
Example of Shorting
The best way to understanding any concept, as complex as shorting is to take an example under consideration.
Taking an example can help you get a better understanding of what shorting is and can also answer ‘can I short Bitcoin?’ for you.
Let us suppose that you are a trader and you want to short 2 BTC. At the time, let’s take the price of Bitcoin to be $10,000. This would mean that you would have borrowed 2 BTC, which will be sold at $20,000.
Now let us consider that the price of the flagship cryptocurrency drops to $9,000 and you close your position. This will be doable if you buy the 2 Bitcoin again that you initially borrowed at a lower price, which would be at $18,000.
According to these prices, your profit will be calculated as follows:
$20,000 – $18,000 = $2,000
Risks of Short Selling BTC
Shorting Bitcoin is a complex concept to understand, especially for people who are new to the crypto space. However, apart from being complex, it is also risky. There are always risks involved in buying or trading crypto but the risks of short selling the crypto king are somewhat more than normal investing.
When you generally invest in asset, you only lose as much as you have invested. For instance, if you invest $5,000 in BTC and the price drops beyond repair, you will only lose the $5,000 you have invested.
When it comes to short selling, the losses you may face can go beyond your initial investment. This entirely depends on the leverage you opt for while shorting BTC.
If you are not careful and do not manage the whole investment, you can lose all your funds. In other words, your position can be liquidated.
How to Manage the Risks?
The risks you may face while short selling Bitcoin can be managed if you know the essential tips. It is a risky venture that can cause a lot more financial damage than you can handle if you do not learn about the tips before you begin.
A lot of the traders shorting Bitcoin use the stop-loss function to minimize the risks and their losses. This function can be applied whether someone is longing BTC or shorting it.
The stop-loss function ensures that there is a point after which your trades are cut-off. This happens only in case the trade does not go well for the traders. The cut-off point means that the losses that you may face will be limited.
If you are interested in shorting Bitcoin then you need to fully understand the concept first and other details as well, such as how to manage the risks, how it works and more. You can get a good idea of what it is and then determine if you are qualified enough to opt for it. Therefore, as a BTC enthusiast you need to know the details mentioned above before you begin.