Planning to Short Bitcoin? Understand the Risks

Are you considering taking a short position on Bitcoin? If so, it is important to understand the risks associated with this investment strategy. This article will explain the risks of shorting Bitcoin and how it works.

• How Shorting Bitcoin Works
• Short Bitcoin in 3 Easy Steps
• Strategies for Mitigating Risk

Bitcoin

Bitcoin, the world’s first decentralized digital currency, has been making waves in the financial industry. Invented by a mysterious individual or group using the pseudonym Satoshi Nakamoto, the cryptocurrency was released as open-source software in 2009. Despite its volatility, many investors see it as a potential store of value and its acceptance is increasing among individuals, businesses, and even financial institutions.

Shorting

In essence, shorting means anticipating a decline in value of a traded asset. 

In long form, Short selling, also known as “shorting” an asset, is a financial strategy in which an investor borrows shares of an asset they believe will decrease in value, and then sells them with the expectation of buying them back at a lower price. The investor then profits from the difference between the price at which they sold the shares and the price at which they bought them back.

Shorting was traditionally an activity for experienced investors with substantial funds, as there is no ceiling to how much an asset’s price can rise. This complex and challenging operation involved setting up a margin account, maintaining a loan, and accurate timing – all of which could lead to greater losses than the initial investment.

However, with the advancement of technologies and financial markets, shorting also became much easier, without the need for challenging operations. Let us show you how to short Bitcoin the right way.  

How Shorting Bitcoin Works

Shorting Bitcoin works similarly to shorting normal assets. It can be done in various ways including options or futures contracts, margin trading, or contract for difference. 

However, a new, easier method has emerged in the market, allowing investors to short Bitcoin. This method, which we will detail in the next paragraph, has become increasingly popular among investors looking to capitalize on market downturns.

Short Bitcoin in 3 Easy Steps

We will use the trading platform Morpher, to short Bitcoin. We recommend Morpher as it provides an easy and safe way to do so. You do not need to maintain complex margin accounts, you can simply bet on an asset going down and profit from the decline of the market while paying zero fees. 

Tip: Use Morpher, as it has negative balance protection. Morpher makes it impossible to lose more than your balance.

Easy

On Morpher, shorting is easy. All you need to do is enter the amount you want to invest and click ‘sell’. With no need for a margin account, maintenance margin, or paying additional interest, you can take advantage of market downturns with a simple click.

Safe

Short selling can be a risky endeavor, as the potential losses can be infinite, resulting in significant extra payments. Fortunately, Morpher offers negative balance protection, ensuring that losses are never greater than the initial investment. Once a position is down by 100%, it will automatically close, avoiding the possibility of further losses beyond the initial investment. Whereas, on other platforms, your position can even go down to -500% and more. 

If you do not have an account on Morpher yet, open one right now; it just takes a minute. 

Step-by-Step Guide

1. Search for ‘Bitcoin’: Navigate to the ‘Markets’ sidebar, click “Cryptocurrency” and scroll down until you see ‘Bitcoin’. Alternatively, the search bar can be utilized to quickly locate the desired asset by typing in ‘Bitcoin’. 

2. Short-Sell ‘Bitcoin’: In the trading view, click ‘Sell’. Enter the desired amount, and select leverage if desired. Then, click ‘Short Sell BTC’. Note: For automated position closing, the three-dot menu above the input amount provides the option to set a stop-loss or take-profit.

3. Close the position: Traders looking to close an existing short position on Bitcoin can do so by pressing the ‘Close Position’ or ‘Buy’ button. This can be done either by selecting a percentage of the position to be closed or by pressing the ‘Close Position’ button beneath the trading view in ‘Your Positions’ which will close the entire position. Here, we would make 0.11% profit on our trade. Note: You are not actually buying bitcoin, you are simply closing your short position. 

Risks of Shorting Bitcoin

Volatility

When shorting Bitcoin, it is important to consider the risks associated with this investment strategy. Bitcoin’s price is renowned for its volatility as you can see from the comparison between the “BVOL” and “VIX S&P500” charts below. While volatility may be welcomed by traders, it also means that they must manage trade risk carefully, as rapid price movements could result in losses. 

Leverage

With leverage trading, investors can have exposure to a larger position than their actual capital. With increasing leverage, you are automatically increasing the risk associated with the trade. This can increase potential losses, as well as increase the risk of margin calls if the price moves against the trader. 

With Morpher, investors have a safeguard against margin calls and heftier losses with negative balance protection. This means that a position will automatically close if the loss is more than 10% or 100% of the balance. To keep risk at a minimum, traders should practice risk management strategies.

Just for your visualization, here are all major Bitcoin Sell-offs, which happen mostly over days or weeks, and are extremely short-term. With Short Selling, you can profit from it, or you can also lose your position really quickly if you have leverage as these price movements are often much higher than 10%.

To illustrate the risks of shorting and volatility, we prepared a chart with corrections of the Bitcoin Run in 2017. In the chart you can see several significant sell-offs, often only spanning a few days to a couple of weeks. If anticipated correctly, short selling can be a profitable venture with 30-40% profits. 

However, you could have missed out on potential profits, as the cryptocurrency has seen an average increase of 153% after each dip in price. Moreover, had an investor not closed their short position, they may have been wiped out completely. Those who were long on Bitcoin, however, would have seen a massive return on their investment.

Strategies for Mitigating Risks

Diversify Your Portfolio 

Diversifying both within and across asset classes is essential for mitigating risk and protecting against unexpected market downturns. Investment portfolios should be comprised of a mix of stocks, cryptocurrencies, bonds, property, art collectibles, and gold – a balance of assets that can help stave off potential losses should the market take a turn. As famous investor Ray Dalio said: 

“Diversification can improve your expected return-risk ratio by more than anything else you can do. That’s because while you can’t know which of the items you are betting on will provide better results, you do know that they will behave differently, and by mixing them appropriately you can reduce risk.”

Diversification is a tactic that investors can use to manage risk and boost returns by spreading their funds across different asset classes, industries, companies, and other categories. This helps to ensure that even if one area of investment performs poorly, the portfolio as a whole remains secure. 

For instance, if a person had only 4% of their portfolio in cryptocurrency and it underperformed, the remaining 96% invested in blue chip companies, real estate, bonds, and energy would provide a buffer. However, it is important to note that diversification is not always the optimal strategy. Here is an opposing take on diversification for experienced investors of Charlie Munger: 

“The idea that very smart people with investment skills should have hugely diversified portfolios is madness. It’s a very conventional madness. And it’s taught in all the business schools. But they’re wrong.”

Use a Stop-Loss

Cryptocurrency markets are open 24/7, making it impossible to manually monitor all of your positions all the time. To protect yourself from significant losses, it is wise to use stop-loss orders, especially for high-leverage trades or those left open over the weekend. On Morpher, you can set a stop loss by accessing the three dots menu next to the ‘Sell’ area.

Here are some quick suggestions for setting stop-loss:

• Set stop-loss levels that are realistic and don’t go too far below market price
• Allow your trade some “breathing room” to account for market volatility 
• Analyze your trading history to gain insight into your risk tolerance 
• If you’re feeling anxious about a stop-loss level, it could be a sign that you’re trading outside your comfort zone

If you want more information on how to protect your downside or take profits at the right time, you should read our article “5 Tips for Using Protective Stops: Stop Loss and Take Profit”. 

Follow a Strategy

When engaging in sophisticated trading techniques such as shorting Bitcoin, it is important to have a plan in place. Trading without a strategy is more akin to gambling than investing. To help traders get started, there are three different strategies to consider when deciding when to go short on Bitcoin. For example, take a look at this Twitter thread example to see how these strategies can be combined into an investment thesis. 

Technical Analysis

Technical analysis is a method of evaluating securities by analyzing statistics generated by market activity, such as past prices and volume, in an effort to forecast future price trends.

On Morpher, you can access different indicators by going to the “Advanced View” and clicking on “Indicators”. The most popular indicators for Bitcoin are RSI, Bollinger Band, and Moving Averages. 

Sentiment Analysis 

Sentiment analysis is a method to extract and quantify subjective information from source materials, such as social media and news articles, in order to gauge the overall market sentiment towards a particular security or sector. For example, you can get a nice overview of sentiment with the Bitcoin Fear and Greed Index or use Google Trends to look at the current interest in Bitcoin. 

Fundamental Analysis

Fundamental analysis for trading Bitcoin is a bit different than for evaluating traditional assets. With Bitcoin, you are evaluating the intrinsic value by analyzing its underlying financial and economic factors such as adoption rate, network activity, mining activity like hash rate, coin movements from exchanges, and more, to determine the long-term potential and make an informed investment decision. 

Staying Informed About Market Trends and News

Staying informed about market trends and news when shorting Bitcoin is an essential part of any investor’s strategy. By staying on top of market developments and news, short sellers can gain valuable insights into the current state of the market, helping them make better-informed trading decisions. For those seeking a better understanding of Bitcoin, there are a wealth of resources available for both maximalists and skeptics. Whether you are a maximalist or a skeptic, going long or going short, here is a collection of high-value resources. These should help you to stay informed on Bitcoin, its implications, market trends, and news.

Case Pro-Bitcoin 

1. Twitter: Michael Saylor, Robert Breedlove, Willy Woo, Nic Carter, Balaji Srinivasan, Andreas Antonopoulos, Raoul Pal, and Saifed Ammous 
2. Books: The Internet of Money, The Bitcoin Standard, What is Money? – The Taylor Series, or check out more book recommendations by a Bitcoin Maximalist
3. Listen: Lex Fridman Podcast #276, Lex Fridman Podcast #176 
4. Articles: The Bitcoin Whitepaper, Bitcoin is Civilization, Bitcoin at 12, An open letter to Ray Dalio re: Bitcoin

Case Against Bitcoin

1. Articles: Bitcoin’s last stand, The Case Against Bitcoin, The centralization of Bitcoin Mining, Why This Computer Scientist Says All Cryptocurrency Should “Die in a Fire”, The Case Against Crypto, Crypto’s biggest critics won’t back down
2. Twitter: Michael Green, Peter Schiff, Michael Burry, Yanis Varoufakis, Stephen Diel, Listen: Both Sides of the Coin: A civilized Bitcoin debate, Crypto is dead, Warren Buffet on Bitcoin, Is Bitcoin the Future of Money? Peter Schiff vs. Erik Voorhees

Information About Bitcoin and the Crypto Industry in General

1. Reports: The Messari Crypto Theses for 2023. Ryan Selkis, a veteran in the crypto industry, writes one of these reports every year. The report offers a great overview and outlook for 2023. The Reflexivity Research Report offers further insight with a combination of a macro overview. 
2. Podcasts: We can recommend the Bankless Podcast and the All-in Podcast. Both give a regular round-up and opinion on Bitcoin, cryptocurrency, and Bitcoin.
3. Market Signals and News on Bitcoin: BTC_Archive, DocumentingBTC, Bitcoin Magazine 
4. Market Data: Glassnode, Coinglass, CoinMarketCap. These resources provide access to important metrics and market data in the cryptocurrency market. 

Conclusion

This article has examined the risks associated with short-selling Bitcoin, as well as strategies to mitigate them. We introduced Morpher as a trading platform that eliminates the need for complicated margin accounts and fees, making it simpler and more accessible to short Bitcoin. Moreover, we showed you a step-by-step guide on how to short Bitcoin in 3 easy steps on the platform. To reduce risk and increase the potential for profit, we recommended diversification, using stop-losses, following a strategy, and conducting thorough research before investing. With these strategies in mind, short-selling Bitcoin can be a viable investment option for every trader.

Disclaimer: All investments involve risk, and the past performance of a security, industry, sector, market, financial product, trading strategy, or individual’s trading does not guarantee future results or returns. Investors are fully responsible for any investment decisions they make. Such decisions should be based solely on an evaluation of their financial circumstances, investment objectives, risk tolerance, and liquidity needs. This post does not constitute investment advice.