2020-4-21 17:21 |
In the early days of Bitcoin, the only way to make a profit was to buy and hold. Many of the wealthiest people in crypto today are early adopters who used this strategy.
However, volatile assets like Bitcoin go down in price almost as often as they go up. If users only hold long positions, then they’re vulnerable to market downturns. Shorting Bitcoin thus offers an opportunity to make money when the price goes down.
Holding short positions doesn’t necessarily mean betting everything on the price of Bitcoin dropping. Many traders use short positions to hedge against losing money on their long positions in the event of a market downturn.
Shorting Bitcoin is more of an advanced trading tactic than simply buying and holding. This guide explains how to short Bitcoin using the different opportunities available on the market today.
Using Margin to Short BitcoinMargin trading is perhaps the most straightforward way to short Bitcoin. To get started, users will need to open an account with an exchange that offers margin accounts, such as Binance or BitMEX.
The idea behind margin trading is that users borrow assets from the exchange and sell them on the market at a specific price. When the price drops, users buy them back at a lower price and pocket the difference.
The amount of margin users can borrow depends on the exchange. Crypto exchanges typically offer high margins. Binance offers 125x, for instance. This means users can borrow up to 125 times their original position, so if users have $1,000 in your account, they can trade with $125,000.
Margin trading is attractive to speculators as it allows them to drastically magnify profits.
However, on the flip side, losses will also be magnified. Therefore, trading on margin can be highly risky if the market moves against a user’s position.
How to Use Derivatives Contracts to Short BitcoinMargin trading typically applies to derivatives contracts, of which there are several different types.
Futures and ForwardsFutures and forwards are very similar trading products.
With a futures contract, one party agrees with another to buy an asset for a fixed price at a certain date in the future. Traditionally, futures were used to hedge against changes in commodity prices.
However, they are now so often used as a speculative instrument that there often isn’t ever a physical delivery of the underlying asset, and the agreement is simply settled in cash. If you buy futures on an exchange like BitMEX, the settlement date is determined by the exchange.
Conversely, parties using a forward contract are allowed to determine the settlement date amongst themselves.
If users wanted to use a futures contract to short Bitcoin, they could buy a contract that allows them to sell BTC for a fixed price. Assuming the price goes below the contract value by the time it expires, the position will turn a profit.
PerpetualsPerpetuals, often called perpetual contracts or perpetual swaps, are a variant of futures contract without an end date.
Perpetuals have become one of the most popular means of shorting Bitcoin and are available on various crypto-derivatives platforms, including OKEx, Deribit, and Kraken.
Perpetuals closely track the spot price of the underlying asset. If a user wants to use perpetual contracts to short BTC, then they’ll use margin to borrow funds so they can sell contracts. The idea is that users will then buy them back at a lower price if the market goes down.
OptionsOptions are a newer product for the cryptocurrency markets. Until recently, Deribit was the only exchange offering options, but now they’re becoming more widely available through OKEx and others.
If a futures contract creates an obligation to buy or sell a given asset for a fixed price on an agreed date, then an option contract means users can decide whether or not to buy or sell the asset under the same terms.
When a user buys an option, they pay an initial premium for the contract itself. A put option is the right to sell an asset, whereas a call option is the right to buy. The buy or sell price is called the strike price.
Options are less risky than futures or perpetuals because there is no obligation. If the expiration date is reached and a user will make a loss by buying or selling, then they simply do nothing, and only lose the value of the premium.
As an example of how to short Bitcoin using options, assume the price today is $10,000.
If a trader buys a put order with an expiration date one month from now, they have the right to sell BTC at $10,000 in a month’s time. If the price drops, they can still sell at $10,000 and make a profit compared to the market price.
Options offer a means of hedging against losses.
For example, if a user is holding a long BTC position, they’re anticipating the price of Bitcoin will rise. But they could also buy a put option that allows them to exercise the right to sell BTC at today’s prices. This strategy means that if the price falls, users can protect against losses.
If the price does go up as anticipated, the user will only be down the value of the option premium from the profit they made from their long position.
ConclusionShorting Bitcoin, or any asset, is inherently risky. Theoretically, losses can be unlimited, as there’s no ceiling to how high Bitcoin’s price can go.
Because the crypto markets are volatile and trading happens 24/7, users will need to ensure that their trading accounts have protective measures, such as stop-losses, in place.
As with any trading or investment decision, make sure to do plenty of research and understand the risks before you dive in.
The post How to Short Bitcoin: A Guide to Cryptocurrency Derivatives appeared first on Crypto Briefing.
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