Short selling, or shorting, is a method by which you make speculative investments. When you short sell, you borrow an asset such as a Bitcoin, and sell it at the current price to make money.
You hope that prices will drop later, so that you will be able to buy a Bitcoin at the new lower price, and return it to the people that you borrowed it from. The difference between the high price at which you sold at first, and the low price that you bought a coin for later, constitutes your profit.
As an example, to start a short sell, you might borrow a Bitcoin when it costs $1000, then sell it at the same price. Afterwards, you wait until the price fell to $500, buy a Bitcoin at this new low price, and return it to the people that you borrowed from; therefore making yourself $500 profit.
How do you start short selling Bitcoin?
If you are interested in shorting Bitcoin, the first thing that you need to do is to sign up to an exchange that offers Bitcoin trading, like DRIVE Markets. Once there, you place an order with them to make a short sell transaction.
The exchange takes a Bitcoin out of its own inventory, sells it, and hands you the money. They tell you that they will be able to call back the Bitcoin that you borrowed, anytime they want. If coin prices drop by the time the lending agency calls back its loan, you get to buy a Bitcoin at the new low price, return it to the agency, and pocket the difference.
Shortselling can be a risky, if profitable proposition
Shorting can be risky, because prices tend to fluctuate unpredictably. This means that if market prices were to rise after your Bitcoin borrowing, returning the Bitcoin would require that you buy one at a price higher than when you sold your coin. You would be out more money than you actually made.
Unlike regular investments where you will never lose any more money than your original investment, shorting investments can end up in losses far greater than your original outlay.
In the example above, if prices were to rise from $1,000 a coin to $3,000 a coin after you borrowed and sold your original coin, you would have to pay $3,000 to get a coin back to return it to the lender. You would be out $2,000, which would be more than the profit you made.
Different events can have effects on the value of Bitcoin
Just as with the stock markets, a number of different events can have unpredictable effects on the value of Bitcoin. Often, prices can drop when major countries announce regulatory measures against Bitcoin.
China, for instance, banned Bitcoin a while ago, and the Securities and Exchange Commission took action against ICOs. News of the failure of a major Bitcoin exchange can drop prices, as well.
In general, Bitcoin prices have trended upward in the long-term. It is only the short-term that prices tend to drop. It is these short-term drops where the profit from shorting can be found.
DRIVE Insider is not an investment advisor. We do not provide personalized recommendations or views as to whether a cryptocurrency or investment approach is suited to the financial needs of a specific individual.