With Bitcoin’s unusual drop in price, investors believe that it is possible to crash further, so taking a short position on the crypto currency might be a good way to stay afloat.
How to take a short position on crypto currencies
The method of taking a short position on Bitcoin involves borrowing Bitcoin and selling it at the current price, and then buying it back at a lower price, enabling you to pocket the difference.
There are many ways to take a short position-sell Bitcoin and these methods differ widely in how much risk they carry, and how much profit you can make from utilizing them. Here are a few of the ways to take a short position on Bitcoin:
Margin Trading
One of the simplest ways to take a short position Bitcoin is through a cryptocurrency margin trading platform. Short selling Bitcoin using margin trading is a means of borrowing Bitcoin against some collateral, then selling that Bitcoin at the market price. If the price reduce, you can buy back the Bitcoin at a lower price and pay back the lender. Margin involves leverage or borrowed money, which can either increase profits or exacerbates losses. Many cryptocurrency exchanges offer margin trading.
Futures Market
Similar to other assets, Bitcoin has a futures market. Futures trading is a means of entering into a contract agreement to either purchase or sell an asset on a future date at a predetermined price. You can bet on the Bitcoin price going down by purchasing a contract that enables you to buy Bitcoin at a lower price in the future.
Futures contracts can also include leverage, with many crypto exchanges offering up to a hundred times leverage on trades. Bitcoin futures are available to trade on formal financial markets through some stockbrokers who offer the service. Various cryptocurrency exchanges also give future trading.
Binary Options Trading
Call and put options also allow traders to take a short position on Bitcoin. A put option on Bitcoin gives you the option to sell Bitcoin in the future at an agreed price. You have to pay a fee to set up a put, and when the put expires, you can decide whether to exercise it. If the market price is lower than the agreed price you can profit by purchasing Bitcoin and then selling it to the holder of your put. If the market price is contrary, you can let the put expire, and you only lose the prize you paid to set it up. Binary Options Trading is primarily offered on crypto exchange trading platforms.
Prediction Markets
Bitcoin prediction markets enable investors to place bets based on a prediction about Bitcoin’s price. Investors who forecast Bitcoin’s price will go down are virtually taking a short position-selling Bitcoin.
Prediction markets in crypto are comparable to those in mainstream markets.
Short-Selling Bitcoin Assets
In this strategy, if you think the Bitcoin price will go down, you sell at the existing price, then buy it back after the price has plunged, making a profit. The Bitcoin is not borrowed, so you won’t be urged to re-buy it to return to a lender. There are also no margin payments to be made, so you can hold your short position for as long as you want at no expense.
Using contract for differences (CFDs)
A CFD is a financial strategy that pays out money based on the price variations between the open and closing prices for settlement. Instead of buying or selling, you enter into an agreement that after a particular date you will correlate the market price of Bitcoin with the price in the CFD.
If the price is higher, you pay the other person the variation. If the price is lower, the other person pays the variation to you.
Inverse Exchange-Traded Products (ETFs)
Inverse exchange-traded products are wagers that an essential asset’s price will decline. They are comparable to and use futures contracts in conjunction with other products to produce returns.
Investing in ETFs is simple, and you can access them at any traditional online brokerage.
What to Consider While taking a short position on Bitcoin
Just like any strategy related to cryptocurrencies, taking a short position on Bitcoin involves huge risks. There are numerous aspects you should consider while taking a short position on Bitcoin.
- Risk: in comparison to other, more established assets, Bitcoin is still developing. Yes, it has been around for 13 years, but still, there isn’t adequate data or information for investors to make an informed judgment about its workings or feasibility as an asset.
- Volatility: when the price of bitcoin is fast fluctuating, you can yield profit just as fast as you can incur losses.
- Bitcoin Regulatory Status: although it has common coverage, Bitcoin’s regulatory status across terrains remains unclear. So the absence of regulatory supervision means that exchanges can get away with offerings that would not be permitted if there were proper oversight.
- Knowledge of Order Types: before attempting a short position on Bitcoin, you should tune up your knowledge of different order types as they can help curb losses if the price trajectory doesn’t go in the direction that you initially predicted.
Taking a short position-selling is a refined investment strategy and is considered a speculative investment with a high risk. Make sure you know the risks before taking a short position on any asset.
If you want to structure your future investments in Crypto currencies or if you wish to open your Luxembourg crypto fund, please contact your Damalion expert.
