By James Davis
Buying BTC at a low price and selling it high is the most popular trading strategy. But do you know there is another trading trick you can employ to profit massively? It’s called short-selling. The strategy involves selling Bitcoin at a high price and repurchasing it at a low price.
Traders short Bitcoin when they believe its price is about to drop. This trading strategy was significantly profitable in early 2022 when BTC, along with other cryptocurrencies, retraced from their peak prices.
However, realizing profits by short-selling cryptocurrencies is not as simple as it may seem. In this article, we will discuss all the important elements that can help you become a successful short-seller.
How Does Shorting BTC Work?
Before diving further into this topic, it is worth highlighting that traders can also short other cryptocurrencies besides BTC. But we will focus more on Bitcoin since it is the most popular and traded digital coin.
The first step to short-selling BTC involves borrowing a particular amount of this crypto asset from an exchange to enter a short position in the market. Once you receive the borrowed Bitcoin, you can sell it at the market price and then buy it back when its price plummet to make a profit. For example, if you sell BTC at $26,000 and repurchase it at $24,000, the price difference will be your profit; in this case, you will pocket $2,000.
You may be asking yourself why it is necessary to borrow BTC. Well, here is why:
Short-selling your own Bitcoin is impossible. And if you do this, you’re simply dumping it in the market and purchasing it back when its price drops. That said, you will need to borrow BTC to benefit from short-selling. Note that crypto borrowing requires you to provide collateral.
Advantages of Shorting BTC
Loss Hedging
The ongoing crypto winter has not been kind to mid and short-term BTC investors. To avoid huge losses, they can ride the dip; that is, borrowing Bitcoin, then selling it high and buying it low.
Better Valuation
Short-selling plays a big role in resetting the price of BTC when it is overvalued. That’s because people who are shorting BTC help in bringing the price down to levels that average investors can afford to buy the crypto asset.
Low Capital Requirement
Short-selling BTC does not require a trader to have huge capital. As long as you can provide collateral, you are good to go. Also, always trade on a crypto exchange offering big margins like 3x or 5x to maximize profits.
Risks Involved in Shorting BTC
Based on the above discussion, we can agree that shorting can be profitable if applied correctly. But every trading strategy carries its own risks. Here are some you should consider before shorting:
Limitless Losses
Since you’re using your crypto as collateral to borrow BTC for short-selling, you risk losing a lot if the price rallies. Here is how: for example, you borrow 3 BTC collateralized by 1 BTC and then sell them at $20,000 each, expecting the price to sink. Unfortunately, Bitcoin begins to rally and hits $45,000. This means you will lose 3 * $25,000 = $75,000.
Margin Interest
Borrowed crypto is considered a loan, just like in traditional finance. Therefore, it attracts interest which is paid on a daily or hourly basis. So you will likely pay more interest if you take long to return the borrowed BTC.
Types of Analysis to Conduct Before Short-Selling BTC
Sentiment Analysis
To effectively carry out sentiment analysis, we recommend you use the Bitcoin Fear and Greed Index. This tool shows social media trends and customer insights to help you have a better understanding of the market’s perspective.
Fundamental Analysis
Some new traders focus only on technical analysis and overlook fundamental analysis. But experts understand that the latest developments around BTC can significantly dictate its price. For example, if the US imposes tough regulations on the crypto industry, you would expect BTC to plunge, thus opening a perfect opportunity to short-sell.
Technical Analysis
You need to be knowledgeable on how to interpret price charts accurately. You can use various indicators, such as Bollinger bands, moving averages, and relative strength index, to predict the next price movement.
Conclusion
As you can see, as much as short-selling BTC is profitable, it is also a high-risk venture. So consider the possible downsides before proceeding.