If you are interested in buying or trading BTC then you should also know about shorting Bitcoin. The crypto space offers more to the crypto enthusiasts then merely buying or trading digital assets. Concepts such as shorting can also be quite useful for people looking to benefit from the crypto space. However, it is important to note that the benefits are never guaranteed and having a good experience of stepping into the crypto space requires you to take time and learn as much as possible about such concepts.
Therefore, if you want to learn about shorting and want to know ‘can I short Bitcoin?’ then you should take a look at the details mentioned below in this guide for beginners.
The more you know, the easier it can be for you to determine if this is something that suits your criteria and requirements or not.
What is Shorting Bitcoin?
Shorting is also called short selling and it is an investment style. This is mostly opted by people who are not optimistic about the price surge of the crypto king in the future. Therefore, opting for short selling, they can still get some benefits (if any) even if the price of the asset drops.
Since Bitcoin is a highly volatile crypto asset, its price fluctuations give a lot of opportunities to people to both long and short it.
If you are interested in exploring ‘can I short Bitcoin?’ then you should know the details below.
How Does Short Selling Work?
The basic idea of shorting Bitcoin is to borrow the asset from a crypto owner and then sell it at its current price. Apart from BTC, you can also opt for other financial instruments and assets.
Since you borrow the funds, or Bitcoin in this case, from a crypto owner you will have to pay them back. The best and most beneficial way to do so is if your trade is profitable and it can only be so if the price of the flagship crypto asset drops after you short it.
If the trade is profitable for you, paying back the person you borrowed from will become cheaper.
Example of Shorting BTC
In order to learn, ‘can I short Bitcoin?’ it is important that you consider an example.
Taking an example is one of the best ways to understand a concept, which is somewhat complex like short selling BTC.
Let us suppose that you want to short 2 BTC and at the time the price of the asset is $7,000. This would mean that you have borrowed 2 BTC and will sell them at $14,000.
Now let us consider that the price of the flagship digital currency falls to $6,000. After this you close your position. This would be doable if you repurchase the 2 BTC you borrowed at a lower price, which will be $12,000.
Now considering these prices, the profit that you will get from this will be calculated as follows:
$14,000 – $12,000 = $2,000
Risks of Short Selling BTC
Shorting Bitcoin, just like every other crypto-related operation in the industry, is a risky venture. The risks are originated due to the volatility associated with the crypto market. This means that since there is a lot of uncertainty, there can be some security risks beyond your expectation.
The best way to be prepared for anything is to gather as much information as possible about a concept, such as short selling.
If you know the risks, you will also be able to understand how to manage them.
If you generally invest in an asset like Bitcoin and the price drops, you will only lose as much as you have initially invested in it. However, with shorting BTC, the financial losses you may face can go beyond what you invested because it will depend on the leverage ratio that you opt for.
Therefore, with short selling BTC, you need to be careful about your funds and how much you can afford to lose.
Tips to Manage the Risks
It has been established above that if you know the risks you might face, you will also be able to understand how to manage or avoid those risks.
While there are many risk management tips followed by other traders, the best one is to use the stop-loss function. This is an order type that ensures there is a cut-off point after which your trades are automatically closed. This is according to a value that you set beforehand and if the loss reaches that point the trade is closed.
This function is used to make sure that the traders do not face more losses than they can afford.
If you properly explore what the crypto industry has to offer you will come across functions such as shorting Bitcoin and more. However, if you are new to the crypto space it is crucial to know about shorting properly before you opt for it.