Most people buy bitcoins and trade them, hoping that their price will rise. Many people aren’t aware that you can make money on financial assets even when their price drops. This is called shorting or short selling. Short selling can be a great way to maximize your profits on Bitcoin, given how its price fluctuates significantly over short periods.
What is Short Selling?
Shorting an asset is an entirely legal way of earning a profit on the stock market. You start by borrowing the asset from a lender and sell it quickly. You earn some money but don’t just spend it yet. You wait for the asset’s price to fall and repurchase it because you have to return it to the lender. Since you bought it at a lower price, you get to keep the difference. It’s essentially the reverse process of conventional trading, where you buy first and sell later.
It does come with its risks. If you anticipate that the price of a stock will fall and the adverse happens, you may end up losing a lot of money. The price of a stock might rise quickly to such high levels that you will have to cut your losses and buy at a higher price than you initially started.
How to Short Bitcoins?
Considering bitcoin is a digital currency, everything related to it exists in the online sphere. You might want to start by getting accustomed to trading bitcoins using tips from sites like digitaltechupdates.com. There are several different modes and financial instruments you can employ to short bitcoins. Here are some commonly used ones.
Bitcoin can be shorted as an asset. These are the bitcoins that you own. You can sell some coins from your pocket, wait for their price to drop, and buy the same amount at a lower price. The difference is your profit. It has the added advantage of not having any interest in it as you’re not borrowing any coins instead using your own.
You can open two types of accounts with your broker: a cash account and a margin account. You get to trade with the money you deposited and a loan amount from your broker in a margin account, whereas in a cash account, you only get to trade with the money you deposit.
This amount is based on a ratio like 1:1, 2:1, or 3:1, whereby your broker loans you that amount. Say you have a 1:1 account, your broker will match the amount of money you deposit in it.
This allows you short Bitcoin with more capital and gains higher rewards, but you have to return the loan amount and interest, margin rate on loan.
Also, be aware that if you short and the price of bitcoin suddenly shoots, you may trigger what’s called a margin call. Here the broker tells you to deposit a certain amount into your account; otherwise, they’ll be forced to sell your bitcoins at a loss to subvert their risk.
As the name implies, a contract for difference is an agreement between a trader and a broker. Here the two parties agree to settle the difference between the price of an asset. Bitcoin CFDs are also available for investors, and like Margin trading, they also have a margin associated with them but are very high.
The only difference is that you don’t buy Bitcoins. Instead, you buy its CFD, which essentially mimics the currency, and these can be shorted as well. The advantage they have over margin trading is that they give you higher exposure to the market, leading you to cash in on even higher gains.