How to Protect your Bitcoin from Market Crashes and make money by Shorting
Some might argue that the crypto winter is over and the cryptocurrency market is now set to embark on another Bull Run. However, if you have been in the crypto space for long, you will recognize that market corrections happen, and a bear market follows every Bull Run.
Following the Bull Run of 2017 when Bitcoin’s price surged to its all-time high of $20,000, the market corrected the following year, with most cryptocurrencies losing over 80 percent of their value. During the winter period, several investors lost their funds due to the market crash.
With the bull market now back, traders should take advantage of both the Bull Run and protect their Bitcoin reserve when the market crashes. One of the best ways to protect your Bitcoin from crashes is by shorting the cryptocurrency. In this post, we will delve into what shorting is, how you can save your Bitcoin from crashing using the method, and the best places to short your Bitcoin.
What is shorting?
Short selling also called shorting, is an investment method where people make money when the price of an asset drops. It is a sophisticated process where investors borrow an asset like Bitcoin and sell it at its current price. Later on, the investors buy Bitcoins to repay the person or company they borrowed the asset from.
The primary aim of this process is to purchase the asset at an even lower price, so the amount you will have to pay back to the borrowers will be lower than the amount you collected. For example, you short sell 10 BTCs when the price was $5,000, which implies that you borrowed $50,000. The price of BTC dropped to $4,000, and you repurchase 10 BTCs at $40,000 and pay back the 10 BTC to the lenders. Thus, you make $10,000 profit in the process.
How shorting can protect your Bitcoin from market crashes
As a Bitcoin investor, the value of your cryptocurrency ha dropped at one point or the other. By borrowing, selling Bitcoin, and repurchasing them at a cheaper rate, later on, you can protect your cryptocurrency investment from market crashes.
You can sell your Bitcoin at a price you are comfortable with and wait for the price to drop further before repurchasing your tokens. That way, you will be able to get way more tokens with less price compared to what you previously had in your wallet.
Shorting Bitcoin is risky as the price can move in either direction. However, selling it and repurchasing at a lower price will allow you to make a fortune from the price dip. The easiest way to short your Bitcoin is to sell your BTC reserve when you believe the market has reached its peak or a drop in prices is around the corner.
Technical analysts use charts to help determine when they should short their BTC reserve or go long. Selling Bitcoin when the price is higher than the original price will see investors make a profit. Shorting should be done when an investor believes that the market is about to crash.
Like we cited in the previous example, when you short sell 10 BTCs at $5,000, you sold cryptocurrencies worth $50,000. If the price of BTC dropped to $4,000 and you repurchase 10 BTCs at $40,000, you have made $10,000 profit in the process.
Asides selling your own BTC holdings, you can borrow the cryptocurrency from lenders such as exchanges and sell the borrowed tokens. Once the price drops, you can repurchase the tokens and repay the lenders and keep the profit you make from the deal.
The process of shorting can save you from the impact of market crashes since you will be making a profit in the bear market. You will also be able to repurchase your Bitcoin reserve at an even lower rate.
Best Places to Short Bitcoin
Now that you understand what Bitcoin shorting is, you must know the best places to short your cryptocurrency when the need arises. There are several places where you can short Bitcoin, and we will look at each of them
You can short sell your Bitcoin via cryptocurrency exchanges. There are several digital exchange platforms that offer such service including the likes of Poloniex, Bitfinex, Kraken, BitMex, and a few others.
Short selling Bitcoin on cryptocurrency exchanges is similar to that of CFDs though the main difference is that here, you will receive your profit in BTC instead of US Dollar. When short-selling on crypto exchanges, investors usually sell Bitcoin that isn’t theirs. Instead, they borrow BTC from margin lenders on the exchange platforms for the duration of the open position. Once an investor closes his/her position, they could gain if the price of BTC drops or lose if the price goes up.
Retail brokerage platforms
Bitcoin investors can also short the cryptocurrency via CFD retail brokers like eToro, AvaTrade, or Plus500. In the crypto space, CFDs (contracts for difference) work similarly to futures contracts. However, with CFDs, investors can bet on either the price increase or decrease of Bitcoin without holding any BTC.
Traders can short or long Bitcoin on the retail brokerage platforms. Since the CFDs are leveraged products, investors would be required to commit a certain percentage of the total amount of trade so as to open a position. Thus, allowing investors to multiply their returns if the market moves in the desired direction.
CME and CBOE
These platforms allow institutional investors to short Bitcoin. CME and CBOE enable investors to sell bitcoin futures on their trading platforms. Bitcoin futures are standardized exchange-traded financial derivatives that make it compulsory for an investor to buy or sell an asset at a pre-determined price and date in the future.
With Bitcoin futures, investors can bet on the price increase of decrease of Bitcoin without having to own the cryptocurrency. Instead of Bitcoin, only cash exchange hands when the positions are closed.
While the CME and CBOE are mostly for American investors, the Stockholm-based Nasdaq OMX exchange serves the institutional investors in Europe. Both institutional and retail investors in Europe can short BTC using bitcoin exchange-traded notes (Bitcoin ETNs). The Bitcoin tracker funds usually trade at a premium price compared to Bitcoin itself. Thus, it is not as effective as shorting Bitcoin on exchanges or via CFDs.
When should you consider short selling BTC?
In most cases, shorting Bitcoin should be done in a bear market. However, some events warrant an investor to consider shorting the cryptocurrency and making a profit in the process. Some of those events include;
Any controversial hardfork
Discovery of bugs that could be exploited and threatens the security of wallets and network performance
Hostile government regulations against Bitcoin
Delays in a desired network upgrade
A famous developer leaving the Bitcoin development team
Negative news from the United States SEC and other powerful regulatory agencies
Failure of a major cryptocurrency exchange
The scenarios mentioned above have all affected the price of Bitcoin at one point, and they could lead to a price decline if they happen again. As an investor, if any of these events are expected to take place, you can decide to short your BTC reserve and purchase when the price declines and the news impact dies down.
You should keep in mind that shorting Bitcoin has both its advantages and disadvantages. By shorting your Bitcoin and the price of the cryptocurrency drops, you will be able to protect your BTC reserve and make a profit in the process. However, if the price ascends, then you will lose instead.
Market crashes and bear cycle are a natural part of not only the cryptocurrency market but other financial markets. Most people lose their funds during the bear market. However, you can protect your Bitcoin reserves by shorting the cryptocurrency while also making a profit along the way. Shorting is a great way to ensure that the value of your Bitcoin remains during the bear cycle.