How to short bitcoin

What is bitcoin shorting?

Bitcoin shorting means selling bitcoin with the expectation that its value will decrease. You can then buy it back later at a lower price and pocket the difference as profit. This contrasts with the traditional approach of "buy low, sell high”.

As an example, in late 2021, bitcoin reached a high of around US$68,000. However, it plummeted over 50% to below US$35,000 by June 2022. That moment presented an opportunity for traders to short bitcoin.

Of course, timing the market perfectly is extremely difficult.

Why short-sell bitcoin?

Profit from market swings

Bitcoin's volatile nature creates frequent price swings in both directions. Skilled traders can capitalise on downward movements to generate profits through shorting.

Protect your portfolio with hedging

Short positions can offset potential losses on your existing bitcoin and cryptocurrency assets. This strategy helps protect your portfolio by balancing long positions against market downturns.

Capitalise on market inefficiencies

Cryptocurrency markets often lag behind traditional markets in pricing accuracy and information flow. Traders can profit by identifying these pricing discrepancies and using short positions to capitalise on overvalued assets.

Trade long-term trends

Bitcoin moves through extended periods of price growth and decline. Traders can generate returns during prolonged downward trends by taking short positions.

What to consider before shorting bitcoin

Monitor market conditions

Assess the broader cryptocurrency and economic landscape before shorting. Periods of high volatility or strong upward momentum can increase your trading risk.

Understand leverage and margin

Know how leverage can multiply both profits and losses when shorting. Implement an appropriate risk management strategy before shorting.

Plan your entry and exit

Define clear entry and exit points for your trades. Remember that bitcoin prices can move unpredictably, especially in the short term.

Track regulatory changes

Stay informed about evolving cryptocurrency regulations and platform rules. Changes in either could affect your ability to maintain short positions.

Calculate all costs

Factor in borrowing fees and financing charges for maintaining short positions. These ongoing costs will impact your potential trading returns.

Choose your broker carefully

Select a reputable platform with a proven track record. Ensure they can consistently execute and settle your short trades.

How to short bitcoin in four steps

Step 1: understand bitcoin

Bitcoin launched in 2009 as the world's first decentralised cryptocurrency, built on blockchain technology. While initially viewed as just an experimental digital currency, it has developed into a recognised financial asset that offers an alternative to traditional financial systems.

The cryptocurrency now functions as a digital store of value, similar to gold, attracting interest from both institutional and retail traders. Major financial institutions and global businesses increasingly accept bitcoin as part of the mainstream financial ecosystem.

A key feature affecting bitcoin's price is the "halving" event that occurs approximately every four years. This programmed reduction in the reward for mining bitcoin impacts the rate of new supply entering the market:

• The 2012 halving reduced the mining reward from 50 BTC to 25 BTC
• The 2016 halving further decreased it to 12.5 BTC
• The 2020 halving cut the reward to 6.25 BTC

Step 2: compare shorting methods

Traditional short-selling lets you profit from falling prices but carries unlimited risk. The higher the price rises, the greater your potential losses. This method requires borrowing bitcoin to sell, making it complex and often impractical since lenders are scarce and can recall their assets at any time.

Derivatives like CFDs offer a more straightforward approach to shorting bitcoin. These instruments allow you to trade on price movements without borrowing the actual cryptocurrency. While this removes the challenge of finding bitcoin to borrow, CFD trading still involves significant risk through leverage.

Here's how a CFD short trade works: if you sold 1 bitcoin at $40,000 and the price fell to $32,500, you'd make a $7,500 profit based on the full position value, not just your initial margin deposit. However, if the price rose to $47,500, you'd face a $7,500 loss. Other derivatives like futures and options also let you short bitcoin, each with their own risk profiles.

Step 3: understand and manage your risks

Short-selling bitcoin carries unique risks compared to buying. When you buy, your maximum loss is limited to your initial stake. When shorting, your potential losses are unlimited if the price keeps rising.

To protect yourself when shorting bitcoin, use these risk management tools:

• Set leverage limits to control your exposure
• Use stop-loss orders to cap potential losses
• Size your positions according to your risk tolerance
• Monitor market conditions continuously
• Apply trailing stops to protect profits
• Diversify your trading positions

While these tools can help manage risk, they cannot eliminate it entirely - especially in bitcoin's volatile market.

Discover our range of risk management tools with IG Academy’s online courses.

Step 4: open an account and place your trade

Once you’re ready to start shorting bitcoin through IG, follow these steps:

• Create an IG account
• Complete your profile verification
• Fund your account
• Choose your position size
• Set your stop-loss levels
• Enter your short trade

Stay informed about factors that could affect bitcoin's price by following our news and trade ideas.

Key points to remember

• Short-selling lets you profit when bitcoin's price falls by selling high and buying back lower.
• Four main trading opportunities exist: market swings, portfolio hedging, price inefficiencies, and long-term trends.
• Success requires careful consideration of market conditions, leverage use, entry/exit timing, and trading costs.
• Manage risks through stop-losses, position sizing, and regular market monitoring.
• Choose between derivatives like CFDs or traditional short-selling based on your trading needs.