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Bitcoin or BTC has been in the market for over a decade and has created a name for itself. This alternative currency was introduced into the market after a major financial collapse. The world was slow to take on the idea of cryptocurrency, but now people are becoming more interested in trading this form of investment.
Cryptocurrencies like Bitcoin are not regulated. They are also not controlled through any framework created by any government. The result is that Bitcoin’s price is highly volatile. BTC has shown such immense volatility that what lingered around $1000 for most of 2017 hit a massive $5000 by October of the same year. By December, it was trading at $19000. In March 2018, however, the price had fallen to an abysmal $8000. Then, Bitcoin saw a meteoric rise and hit $65000 by November 2021. The interesting pricing features and the futuristic views on Bitcoin created interest in the cryptocurrency for institutional investors as well.
Shorting Bitcoin
Though the outlook on Bitcoin is mostly positive, the price fluctuations have created a large group who bet against Bitcoin. Bitcoin futures are actively traded. Hedge funds and large institutional investors kept looking forward to such an opportunity for some time, and once the Bitcoin futures were available, they didn’t hesitate to short it. The primary reason for such a mindset is the volatility of its pricing.
Is it the next big short?
The meteoric rise in the BTC price has made people believe there will be meteoric falls in the price too. By shorting, you sell it when the price is high and buy it when the value has fallen. The drop in value enables you to sell high and buy low. Thus the difference in the price minus the transaction fee is what you earn.
Analysts believe that the extremely high price of Bitcoin is unsustainable. The rise in the value is so sharp that it is bound to come down. One more factor that adds to the volatility is the deregulation of Bitcoin. No governments regulate the value of cryptocurrencies. Bitcoins are truly anonymous.
All these factors combine to form the basis of Bitcoin being one of the best shorting opportunities available today.
What are the options available to short sell Bitcoin?
There are quite a few options available to short sell Bitcoin.
- Direct Short Selling: This can be done if you hold Bitcoins. You can sell off your Bitcoins at a price you think is high. When the price falls below a pre-decided amount, you can buy again. The profit you make is yours. In the end, you still have the same number of Bitcoins, and yet you make a handsome profit, thanks to the volatility in its price.
- Margin Trading Bitcoin: Margin trading is an age-old concept. People have been margin trading stocks. This is done by borrowing money from your broker to make the trade. The policy is the same you sell when the price is high and buy back at a lower price. You have to pray that your bet pays off because margin trading comes with a settlement cycle. So if you sell Bitcoins and the trade goes against you, you cannot wait indefinitely for the transaction to go your way. You have to square it off on a fixed date.
- Futures Trading Bitcoin: Yet another option for traders to short Bitcoin. Futures are basically future contracts that traders agree to buy Bitcoins at a fixed price on a future date. This way, you hope that Bitcoin prices will rise and you can buy them at a lower price than the market price when the contract expires.
- Options Trading Bitcoin: Options are another contract-based trading tool traders can use. There are “put” and “call” options that one can use as per their plan. With put, you can sell a given amount of Bitcoins at a fixed price at a given time. The price is called the strike price. If the value of Bitcoin goes down during this time, put option gains in value. The call option also lets you buy contracts at a fixed date. The date is called the expiration date.
In these ways, you can take advantage of the volatility of BTC prices and earn by shorting Bitcoins.
