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Phemex Crypto Blog: Learn the latest news, updates, and industry insights on bitcoin futures, bitcoin trading, crypto derivatives exchange, and related blockchain technology.

How to Short and Long Bitcoin (BTC)?

Summary

What does it mean to short Bitcoin?

  • Shorting works when a drop in BTC value is anticipated, traders borrow Bitcoin and immediately sell it for currency. Once the value of Bitcoin drops, they repurchase the sold assets and return them to the lender, keeping the difference in price as profits.

What does it mean to long Bitcoin?

  • Essentially, longing an asset means you’re betting on its long-term appreciation. In the case of Bitcoin, one way of minimizing risk while longing Bitcoin is to ‘stack sats.’ This describes buying small amounts of Bitcoin (satoshis or ‘sats’) at frequent intervals.

how to short and long bitcoin

From what started as an obscure technology designed by a handful of people to becoming a household name across the world, Bitcoin has inspired millions to invest in decentralized digital assets. Satoshi Nakamoto’s 2009 whitepaper would change the global financial industry for good, creating an investment that would grow faster than anything else the world had ever seen.

Bitcoin’s growth from a few cents to surpassing $20,000 has been an absolute roller-coaster, creating fortunes for some and bankrupting others. Trading or investing in cryptocurrencies isn’t for the faint-hearted, so it’s crucial to know when to buy and when to sell.

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On the surface, trading sounds simple. The stereotypical ‘man in front of a computer screen clicking buttons’ is a convincing façade for the mind-games that play behind the scenes. In reality, trading is an intense game of quick decisions, knowledge, and willpower.

It takes skill to climb the jagged edges of a bull-market and more so to ski down a bear market’s slopes. The markets are unforgiving, so remember only to invest as much as you can afford to lose and to do your own research before investing any amount.

What Does Bitcoin Shorting Mean?

Bitcoin is a volatile asset, and while this means BTC is capable of making huge gains, volatility works both ways. When a drop in BTC value is anticipated, traders borrow Bitcoin and immediately sell it for currency. Once the value of Bitcoin drops, they repurchase the sold assets and return them to the lender, keeping the difference in price as profits. This maneuver is known as shorting, and it can be an incredibly effective way to grow your portfolio.

sell short bitcoin

How does Bitcoin Shorting work?

If a trader borrows 0.1 BTC when Bitcoin is at $15,000, he gets $1,500 to reinvest when Bitcoin falls to $10,000. At this price point, the investment is worth 0.15 BTC, leaving the trader with a little less than 0.05 BTC in profits after paying interest.

This may seem like an overtly ideal scenario, but Bitcoin has made larger movements in the past. Understanding when to short your holdings is crucial – sell too early, and you lose out on growth, sell too late, and your assets lose value. It’s also possible to short an asset without direct exposure to it. Derivatives markets allow traders to profit from holding contracts that derive value from an underlying crypto-asset.

Need to learn the difference between Spot Trading and Derivatives Trading? Read our Blog Article

Bitcoin was created to be used as a peer-to-peer payments system, but BTC has found increasing use as a store of value in recent years. Compared to commodities like gold, oil, and most fiat currencies, Bitcoin has behaved as an excellent hedge against inflation. Its rapid growth and increasing scarcity encourage countless people every day to invest in Bitcoin long-term, but there’s more than just one way to maximize those gains.

What Does Bitcoin Longing Mean?

Essentially, longing an asset means you’re betting on its long-term appreciation. In the case of Bitcoin, there’s enough evidence to suggest it’s a great long-term investment, but as always, do your own research before making any decisions. Some investors periodically invest large amounts every year, and some only buy when the price dips down.

buy long bitcoin

How to minimize risk while longing Bitcoin?

One way of minimizing risk while longing Bitcoin is to ‘stack sats.’ This informal term describes buying small amounts of Bitcoin (satoshis or ‘sats’) at frequent intervals. This dollar-cost averaging method helps minimize losses incurred due to Bitcoin’s volatility and creates a more consistent portfolio growth over time.

When investing long-term, it’s also imperative to store your digital assets securely. Online exchange wallets are generally insured, but offline or ‘cold storage’ wallets offer greater security by making your holdings inaccessible from the network. It’s possible to use a spare phone or laptop for this, but hardware wallets are the ultimate solution, offering features like an in-built screen, quick transfers, multi-sig, and more.

Learn Why you need a Cold Wallet with Hot Wallet vs. Cold Wallet

Traders long and short assets for different reasons, and these can change with time. Though you may only be interested in Bitcoin, diversifying your cryptocurrency portfolio can reduce your risk exposure. Bitcoin affects the cryptocurrency market just as much as the market affects Bitcoin.

Investing on the Spot

Before you can long or short Bitcoin, you need to make sure you have an account on a cryptocurrency exchange. Exchanges allow you to trade cryptocurrencies with other people by matching bids and asks on an orderbook.

The exchange determines an asset’s price based on its supply and demand, which it calculates from trades placed on the orderbook. When you place an order on an exchange, a matching engine tries to find a trader willing to sell at the price you’re ready to buy. An exchange with more traders generally matches trades faster and is said to be more liquid.

Liquidity is determined by how easily an asset can be traded and measured using various factors, including blockchain transaction speeds, market sentiment, and market makers’ availability. Spot prices generally depict an asset’s market price, but make sure to use a reliable price data source before placing your orders.

Once you have an account, you’ll need to deposit your cryptocurrencies onto your exchange wallet. This may incur a deposit fee, but it will allow you to deal with other traders on the platform. When you place an order to buy or sell, make sure to enter your price position and set a stop loss to minimize slippage.

After the exchange matches your bid or ask with another trader, cryptocurrency is transferred to or from your wallet. Once you’re done, transfer your assets from the exchange to your cold wallet or hardware wallet storage to keep them secure.

Spot exchanges are the beating hearts of the cryptocurrency ecosystem, and it’s critical to learn the functions of the exchange you trade on. Features like Stop Losses can be hugely beneficial during sharp market movements, and learning better ways to trade will only ever help you in the long term.

Short and Long Bitcoin in The Crypto Derivatives Market

As mentioned above, the spot market isn’t the only place you can bet on Bitcoin’s market performance. Derivatives contracts offer the opportunity to profit from Bitcoin’s growth without direct exposure to the asset class. These contracts derive their value from an underlying asset – in this case, Bitcoin.

Derivatives contracts open up a whole new dimension for cryptocurrency trading, allowing investors to long and short not just the derivatives contracts but also the underlying crypto assets. Bitcoin derivatives contracts are available on various exchanges and come in many forms, from options and futures to perpetual swaps and forwards.

An ‘option’ is a derivative contract that allows the holder to buy or sell the underlying asset at a particular price before a particular date. Traders buy ‘Put’ options when they think the market is bearish, allowing them to sell the asset at a price higher than the market price in the time before expiry.

A ‘call’ option allows traders to buy Bitcoin at a lower price than the market value before expiry and is usually purchased in a bull market. In these scenarios, a put option would be akin to shorting the asset, while a call option is similar to long trades.

Futures contracts function similarly, except that the contract holder must follow through on the obligation to buy or sell the asset at the predetermined price on a set date. However, derivatives traders also have the option of trading the contract itself.

Derivatives exchanges charge a premium on purchases of derivatives contracts, and as the contracts approach the expiry date, the value of the contract can change depending on the market. Contracts can be sold at any point to recover some of the capital spent on them, but more than to make profits, derivatives are used to protect investments.

Since futures and options have a fixed expiry, they require traders to constantly recreate their market positions once the date arrives. Perpetual swaps are another kind of contract that do not have expiry dates. They’re the star of the derivatives contracts show, and also, unlike other derivatives, closely track the price of the underlying asset.

This is made possible through funding rounds, which occur every eight hours, where contract holders either pay or receive a fee depending on the contract’s position. If the contract value is higher than the spot market value, long positions pay the fee to the short position holders and vice versa.

What does it mean for shorting Bitcoin?

This makes shorting crypto much simpler.It is practically the same experience as longing except the market is expected to move downward. By betting against Bitcoin’s growth in the derivatives market, you can protect yourself against sudden crashes on the spot market. Using the gains from derivatives, traders can also make up for losses on the spot market, and profit from price movements in either direction.

Conclusion

At the start of 2020, the blockchain industry had a market capitalization of around $200 billion, which rose to nearly $470 billion by the end of the year. Blockchain technology and digital assets continue to show their potential worldwide, and with time, decentralized networks may become more prominent among our global financial systems.

Already, most banks and national governments are exploring the technology. From faster and cheaper cross-border transactions to government-issued digital assets, cryptocurrencies are a versatile asset-class. As the number of ways to invest in them grows, so too will their ability to generate value.


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