Bitcoin is a highly volatile asset. Anyone can profit when the price goes up, but taking advantage of negative price movement is not so clear cut.
To do this most effectively, you need master how to short Bitcoin.
In this article, we will learn about:
- Selling Bitcoin to “short” Bitcoin
- Short-selling Bitcoin
- How to short-sell Bitcoin
- How to do this on Liquid
But before you get too deep into shorting and margin trading, take some time to learn more about margin trading, and crypto trading in general. Risk management is a key aspect of any trader’s strategy, so ensure you have risk management techniques in place.
Remember, trading on margin can increase your potential profits, but also your potential losses. Trade with confidence, but remain vigilant. You don’t want to risk your portfolio.
What is shorting?
Shorting an asset is essentially hedging a bet that the price will decrease. If the price goes down, you profit.
However, if the price goes up, you make a loss.
Shorting is an excellent addition to your trading repertoire, especially during a bear market.
You can short Bitcoin on Liquid. There are essentially two ways to go about it. You can:
- Sell Bitcoin for fiat when you believe a price decrease is coming and then buy a dip.
- Short-sell Bitcoin on an exchange like Liquid that support margin trading. (Liquid has Bitcoin margin trading against fiat with up to 25x leverage.)
We’ll start with number 1.
Selling Bitcoin to buy it back
This simple method enables you to gain from downtrends.
If you are holding Bitcoin and you believe a price drop is imminent, you can sell your Bitcoin holdings for fiat.
How do traders know when Bitcoin is going to drop (or go up)?
They use technical analysis and study things like:
- Mathematical indicators
- Chart patterns
- Support and resistance levels
So if you sell your Bitcoin and the price drops, you are then able to buy back your Bitcoin at the lower price.
You have essentially shorted Bitcoin and you now have two routes:
- Buy back the amount of Bitcoin you had before and keep the remaining fiat; or
- spend all of the fiat on Bitcoin and have more Bitcoin than you started with.
If you go for the first route and keep the fiat you made off the trade, you have gained fiat, but your Bitcoin holding is now worth less.
If you choose route two, you have gained more Bitcoin, but your holding is worth the same in fiat currency. For this to generate a profit the price must increase again.
If you want a quick and easy way to learn how to short Bitcoin, this method is a good place to start.
Now let’s take a look at true short-selling.
How does short-selling Bitcoin work?
When you are short-selling Bitcoin on Liquid, you borrow Bitcoin and instantly sell it. If the price moves downwards, you are able to buy back more Bitcoin than you sold and therefore you can pay back the exchange for the borrowed Bitcoin, along with a small bit of interest, and keep the profits.
However, if the price of Bitcoin rises, you would have to buy back the Bitcoin at a higher price, resulting in a loss, taken from your personal funds.
One factor you have to take into consideration is leverage.
Leverage refers to the amount that you will borrow in order to execute your trading position. Leverage is calculated as a proportion of your total trade.
If you are planning to short 1 BTC, and you use 2x leverage, you will be borrowing 0.5 BTC from the exchange, and the other 0.5 BTC will be from your funds.
If you use 25x leverage for a 1 BTC short you will only need 0.04 BTC from your end, and the rest will be borrowed.
Margin trading is a way for your to increase your positions by borrowing assets so you can take full advantage of shifts in price.
How to short-sell Bitcoin
If you’re are ready to short-sell Bitcoin, here are the steps:
- Choose the amount of Bitcoin you want to short with.
- Select the leverage amount you wish to use.
- Enter the price at which you would like to enter the short position. If you order is executed, you will borrow the Bitcoin for it to be sold at the price you chose.
If the price goes down, you are able to close your position and buy it back. You then return the Bitcoin that you borrowed from the exchange, along with the interest and any trading fees.
Beyond that, the rest of the Bitcoin is yours to keep.
Short-selling Bitcoin allows you to increase your Bitcoin holdings so you can either cash out for fiat or increase your stack and make further profits later on.
That’s the basics of how to short Bitcoin. Now let’s look at an example.
Imagine the price of Bitcoin is USD6,000.
You want to short Bitcoin because you think the price is about to drop.
You are going to short with 1 Bitcoin with 25x leverage. This means that USD240 from your account will be used for the trade, known as required margin.
You then combine your funds with borrowed funds to make 1 BTC.
You enter the short position at USD6,000, so the 1 BTC is sold on the market.
The price of Bitcoin then drops to USD5,500 and you close the position.
When you close the position you buy back 1 BTC for USD5,500, and there is USD500 left over.
1 BTC is returned to the exchange, and you get back your USD240 margin. From the USD500 profit interest is paid on the loan, and exchange fees are paid.
The remaining funds are your profit.
Now that you understand how it all works, we can walk you through how to short-sell Bitcoin on Liquid.
How to short Bitcoin on Liquid
To start margin trading, head to Liquid.com and click on margin at the top left.
The first thing you need to do is select the trading pair, which will be BTC against fiat. In this example we will be using USD, so we will select the BTC/USD pair.
- Setting a limit order will only buy once the price reaches your entered price. The entered price must be better than the current price.
- A market order will instantly fill your order from the best market offers.
- A stop order will also only buy once the market price reaches your entered price. In this case, your entered price must be worse than the current price.
- A trailing stop order trails the market price at the price distance entered by you. If the price declines more than the entered price distance, the order is executed.
Next you must choose the amount of leverage and the leverage mode. There are three leverage mode options:
- One-Direction: Newly opened position has to be in the same direction (buy or sell) as current open position.
- Two-Direction: Newly opened position does not have to be in the same direction (buy or sell) as current open position.
- Net-Out: Newly opened position cancels out currently open position. For example, one long position for 3 BTC and one short position for 2 BTC opened after in Net-Out mode will result in one long position for 1 BTC.
Finally, choose your funding currency. This allows you to choose which of your funds you use as margin for your trade.
Once the order is filled, your position will be live. It will then be reflected in the positions section.
Now that your position is live you can set your levels for stop loss and take profit.
The Unrealized P&L section gives a good insight into the overview of all of your open positions combined.
If you want to close your position, hover over the dotted lines on the left of your position and choose either close or claim.
Closing a trade by "claiming" the position means you deposit in a fiat or crypto amount equivalent to your loan to buy or sell off the trade, turning it into a spot trade.
That’s it! Your first Bitcoin short is complete.
This content is not financial advice and should not form the basis of any financial investment decisions nor be seen as a recommendation to buy or sell any good or product. Trading cryptocurrency is complex and comes with a high risk of losing money, particularly if you trade on leverage. You should carefully consider whether trading cryptocurrencies is right for you and take the time to learn how trading works and decide how much money you are prepared to lose.
Providing liquidity for the crypto economy.