Investors trying to figure out how to short Bitcoin have to navigate a lot of confusion.
A quick Google search will turn up many so-called guides on "How to Short Bitcoin." But for most investors, particularly those living in the United States, these guides are at best incomplete and at worst misleading.
Many offer a half dozen or more ways to short Bitcoin. It sounds great until you realize many of the suggestions aren't available to U.S.-based investors. Time and again, U.S. regulations stand in the way.
For instance, some articles suggest investors use a type of derivative called a CFD (contract for differences) to short Bitcoin. CFDs are illegal in the United States.
Others suggest using prediction markets. In a prediction market, people can wager on the outcome of a real-life event such as an election or whether a cryptocurrency will reach a certain price level by a certain date.
But prediction markets exist in a legal grey area in the United States. The Commodity Futures Trading Commission (CFTC) has acted against some while letting others operate by way of a no-action letter. And where Bitcoin is concerned, most prediction markets have too little activity to be of practical use.
Using cryptocurrency exchanges is another common suggestion. It makes sense, since most U.S. online brokerages have built-in tools for shorting stocks and exchange-traded funds (ETFs).
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But while many crypto exchanges do offer a way to short Bitcoin and other cryptocurrencies, few allow U.S. customers access to those features. (There's one notable exception, which I'll get to in a minute.)
Nevertheless, U.S.-based investors do have ways to bet on a drop in the price of Bitcoin, even if they don't all meet the strict definition of "shorting."
Let me show you...
How to Short Bitcoin if You Live in the United States
Retail investors in the U.S. have several options for shorting Bitcoin:
- Short Bitcoin on Kraken using leverage: The San Francisco-based Kraken was the only major crypto exchange I could find that allows U.S. customers a way to short cryptocurrencies. It's not as straightforward as a tab or a button, though. You need to use Kraken's margin trading feature. In the order form, you select a level of leverage between two and five and specify how much crypto you want to sell, thereby shorting it. You have to close the position to recognize any profit (or loss if the market goes against you). Note that each trade incurs an "opening fee" as well as a "rollover fee" every four hours as long as the trade remains open. So it's definitely for short-term trades only. Kraken has a video that explains the process in detail.
- Bitcoin options on LedgerX: While not shorting in the traditional sense, options trading on LedgerX does give retail investors a way to bet on the price direction of Bitcoin. You can use put options if you think the price of Bitcoin is headed lower. But LedgerX options can only be exercised on the expiration date, limiting your flexibility. To find out more, check out our guide to Bitcoin options trading.
- Trade Bitcoin futures through a broker: Like options, Bitcoin futures aren't exactly shorting, but they do offer a way to bet on a future price drop. Several well-known retail brokerages, including TD Ameritrade, Schwab, and E*Trade, offer Bitcoin futures trading - provided you meet their requirements.
- Sell high, buy low: If you already own some Bitcoin, you can effectively short it by selling some prior to the price decline you're anticipating. If the Bitcoin price falls, you can then simply buy it back at the lower price. With this method, you can either pocket the difference or reinvest it in more Bitcoin.
Each of these will work, but there is one way to short Bitcoin that beats any of these...
The Best Way to Short Bitcoin
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The best way for most U.S. investors to short Bitcoin, although it's not perfect, is to short a Bitcoin fund.
For now, you have just one choice: Greyscale's Bitcoin Investment Trust (OTCMTKS: GBTC). It can be bought and sold through most U.S. retail brokerages, and it's a genuine short - no gimmicks required. But as an OTC-traded asset, the availability of shares to borrow can be limited. That means at times you may have trouble getting your trades to execute.
One bonus to shorting the Bitcoin Investment Trust is that while it is designed to track the price of Bitcoin, it trades at a 10% to 15% premium to that price. Should the U.S. Securities and Exchange Commission (SEC) approve one or more Bitcoin ETFs within the next few years, that premium will drop to zero. Anyone holding a short position in GBTC will reap a quick gain.
A Bitcoin ETF, when it ultimately arrives, will obviously be an even better choice for shorting Bitcoin than GBTC. A Bitcoin ETF will trade on the major exchanges and have plenty of liquidity, making it a snap to short through your broker. Keep an eye on this.
Now that you know how to short Bitcoin, you need to think about when to short Bitcoin.
Unlike a stock, Bitcoin has no fundamentals to monitor. You need to go by the charts. There's no shortage of folks doing technical analysis on the price of Bitcoin, including a few heavyweights such as Peter Brandt. You can find a lot of Bitcoin TA on sites like TradingView.com as well as most crypto news sites.
Bitcoin's high volatility and tendency to trade in long bull and bear cycles make it a good asset to short. In its short 10-year history, Bitcoin has experienced several parabolic rises, followed by deep plunges of 50% to 90%. Shorting Bitcoin anywhere near one of those peaks will deliver huge gains.
And those who seek to short Bitcoin should be in luck if they remain patient. I expect another major rally to develop in the months after the next Bitcoin reward halving in May. This rally could well push the Bitcoin price to $100,000 by 2021. That will set Bitcoin up for another big price decline.
So when Bitcoin goes parabolic again, that's when you move in. Smart traders will make money on Bitcoin when it rises and when it falls.
Of course, some will try to play Bitcoin's week-to-week volatility by shorting it. But Bitcoin often makes sharp, unexpected moves to the upside. Prices are vulnerable to manipulation by "whales."
That makes shorting Bitcoin in the short term a game to be played with extreme caution.
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About the Author
David Zeiler, Associate Editor for Money Morning at Money Map Press, has been a journalist for more than 35 years, including 18 spent at The Baltimore Sun. He has worked as a writer, editor, and page designer at different times in his career. He's interviewed a number of well-known personalities - ranging from punk rock icon Joey Ramone to Apple Inc. co-founder Steve Wozniak.
Over the course of his journalistic career, Dave has covered many diverse subjects. Since arriving at Money Morning in 2011, he has focused primarily on technology. He's an expert on both Apple and cryptocurrencies. He started writing about Apple for The Sun in the mid-1990s, and had an Apple blog on The Sun's web site from 2007-2009. Dave's been writing about Bitcoin since 2011 - long before most people had even heard of it. He even mined it for a short time.
Dave has a BA in English and Mass Communications from Loyola University Maryland.