How to Short Sell Bitcoin and Cryptocurrency CFDs

January 04, 2019 16:43 UTC
Reading time: 12 minutes

2017 was a historic year for cryptocurrencies. Take Bitcoin as an example. On January 1st the same year it was trading at around $900. In May it rose to above $2,000. In September it just fell shy of the $5,000 price level. By the end of the year Bitcoin had made an all time high just above $19,000 (17 December).

Who would want to do anything but buy Bitcoin and speculate on higher prices? Well, one year later, in December 2018, Bitcoin was trading at just above $3,000. After soaring over 2,000% higher at its peak, the cryptocurrency market wiped off $700 billion in market cap in just one year. However, for some traders it wasn't all bad.

There were some who were banking on Bitcoin and the entire cryptocurrency market falling. These traders were short selling CFDs (Contract for differences) on cryptocurrencies - such as Bitcoin, Ethereum, Ripple, or Litecoin to name a few. This just goes to show that learning how to short cryptocurrency CFD could be a useful Bitcoin trading strategy for the future!

What is Shorting Bitcoin and Being Short on Cryptocurrency CFDs?

Being short on cryptocurrencies, or shorting bitcoin, can be defined as taking a bearish trade on the CFD instrument. This means that the trader believes that the price of the trading instrument will fall and is making a trade to profit from the fall. When cryptocurrency prices are rising, most traders will use a cryptocurrency trading strategy that involves buying low and selling high. However, when it comes to shorting bitcoin, or generally being short on cryptocurrency CFDs, the trader will sell high and buy low - making a profit in the change of the cryptocurrency's price.

In this instance, the trader would open a short position, or a 'sell' trade, rather than a 'buy' trade. It could be to sell Bitcoin, to sell Litecoin, to sell Ethereum, to sell Ripple, or any other cryptocurrency CFD. Whatever the instrument is, the trader is aiming to profit from falling prices. So how do you actually short cryptocurrency and take a short Bitcoin position?

How To Short Sell Bitcoin and Other Cryptocurrencies CFDs

In the traditional approach to short trading, the short seller would borrow the crypto coins they do not own. They would then sell these coins on the open market at the market price. The aim is for the short seller to buy back those coins at a lower price in the future. The short seller would then profit from the difference of what they sold them for against the cost of buying the coins back. While the concept sounds simple, where do you find someone to borrow coins from for you to sell on the open market?

Some will go to an exchange to find willing sellers - such as a futures exchange. However, shorting Bitcoin futures requires a regulatory minimum of $250,000 in your trading account. On top of that, you can only trade in minimum lots of five Bitcoins. At Bitcoin's all time high, it was worth over $95,000! This is just one of the reasons why the popularity of shorting Bitcoin and other cryptocurrencies has occurred, and why it should seriously be considered for the budding cryptocurrency trader.

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Why Short Cryptocurrencies via CFDs?

A CFD (or Contract for Difference) enables professional traders to speculate on the rise and fall of a market, without ever owning the underlying asset. However, there are still two parties involved - the trader and the broker. At the end of the contract, the two parties exchange the difference between the price of the cryptocurrency at the time they entered into the contract, and the price of the cryptocurrency at the end.

Essentially, the trader is paying the difference between the opening and closing price of the cryptocurrency they are trading. The simplicity of entering and exiting positions, compared to other trading vehicles, is just another reason why short selling cryptocurrency CFDs is very popular. That's not to say it's easy, of course, but there some added benefits, such as:

  • Safety: Many cryptocurrency exchanges have been hacked in the past as they generally offer poor security. Trading via a cryptocurrency CFD broker means that you could be trading with a regulated company, ensuring the safety of your funds.
  • Leverage: A retail trader can trade positions two times their balance. A Professional trader can trade positions five times their balance. (If you would like to learn more about the differences between Retail traders and Professional traders, together with, how you get Professional client status, make sure to read Admiral Markets' 'Retail and Professional Terms' webpage.)
  • Trade in any direction: Go long or short on any cryptocurrency CFD. No actual crypto assets are required to trade.
  • Access a wide range of cryptocurrencies: Trade Bitcoin CFDs, Litecoin CFDs, Ethereum CFDs, and Ripple CFDs, among others.
  • 24/7 trading: Trade 24 hours a day, 5 days a week on cryptocurrencies paired with the Euro, such as the BTC/EUR (Bitcoin/Euro) crypto pair.
  • State-of-the-art trading platform: View cryptocurrency CFD prices on secure and stable platforms such as MetaTrader 4, MetaTrader 5, and MetaTrader WebTrader and use advanced features like trading directly from the chart. In addition, download the MetaTrader Supreme Edition plugin for MT4 and MT5, and benefit from an enhanced trading experience, as well as the ability to extend the amount of tools available to you even further!

When it comes to learning how to short cryptocurrency, having the right products at your fingertips is hugely important. With an Admiral Markets CFD trading account, you can speculate on rising and falling prices, as well as access other advanced features. This offers traders unique flexibility when trading cryptocurrencies. Click the banner below to receive a FREE MT5SE download!

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Cryptocurrency Trading Strategy

One of the advantages of trading cryptocurrencies is the fact that they move in a similar way to every other financial market - be it stocks, commodities, or Forex. Even different cryptocurrencies, such as Bitcoin CFD, Litecoin CFD, Ethereum CFD or Ripple CFD exhibit similar characteristics. That's because markets move based on the behaviour of the people who buy and sell them in them.

Quite often, the decisions of a mass group of people (all those who are trading) creates patterns. Some of these patterns can also be identified using technical analysis, or the study of price charts, to identify repeating patterns and clues on the probability of the future direction of the market being traded.

Trading Cryptocurrency CFDs in MetaTrader 5 Supreme Edition

Source: Admiral Markets MT5 Supreme Edition - #BTCUSD, Weekly Chart - Data range: 26 March, 2017 to 13 December, 2018 - Performed on 13 December 2018 at 11:02 AM GMT - Please Note: Forecasts such as this are not a reliable indicator of future results, or future performance.

In the screenshot above of BTCUSD (Bitcoin/US Dollar), taken from MetaTrader 5 using the MetaTrader Supreme Edition plugin, it shows that buyers were actively buying around the $5,600 level (highlighted in the yellow box). For whatever reason, at that particular level, buyers entered the market, thinking that Bitcoin might push higher from that level.

Trading Cryptocurrency CFDs in MetaTrader 5 Supreme Edition

Source: Admiral Markets MT5 Supreme Edition - #BTCUSD, Weekly Chart - Data range: 26 March 2017 to 13 December 2018 - Performed on 13 December 2018 at 11:07 AM GMT - Please Note: Forecasts such as this are not a reliable indicator of future results, or future performance.

But, it is clear to see that not enough buyers were joining in to create a significant move higher. In fact, each time buyers stepped in to the market to try to push it higher, they failed to push the market above previous high points. Surely, it would be a matter of time before the buyers threw in the towel at the $5,600 level, and then let the sellers take control? Technical analyst cryptocurrency traders would use the highlighted blue lines as levels of support and resistance to identify whether to buy or sell.

Trading Cryptocurrency CFDs in MetaTrader 5 Supreme Edition

Source: Admiral Markets MT5 Supreme Edition - #BTCUSD, Daily Chart - Data range: 18 June 2018 to 13 December 2018 - Performed on 13 December 2018 at 11:14 AM GMT - Please Note: Forecasts such as this are not a reliable indicator of future results, or future performance.

In November 2018, buyers threw in the towel at the $5,600 level and let sellers take control. This is where traders would now start to consider shorting Bitcoin, or selling Bitcoin to profit from the falling prices.

Trading Cryptocurrency CFDs in MetaTrader 5 Supreme Edition

Source: Admiral Markets MT5 Supreme Edition - #BTCUSD, Daily Chart - Data range: 15 September 2018 to 13 December 2018 - Performed on 13 December 2018 at 11:22 AM GMT - Please Note: Forecasts such as this are not a reliable indicator of future results, or future performance.

To time these trades, a popular method is to use price action trading strategies, and one of the most popular is the pin bar reversal. This is where a price bar initially moves higher, only to be rejected and then pushed all the way back down with the open and closing price in the lower half of the bar. Given the context of the bigger picture as discussed above, some traders would assume that the next higher probability move is to the downside.

A possible entry price could be on the break of the pin bar's low ($5,299) with a stop loss at the high ($6,264). If the entry price was executed, and the market turned higher and hit the stop loss, this would have resulted in a $965 loss, trading 1 lot (which is equal to 1 Bitcoin). However, if the trader held onto their short bitcoin, then as of 12 December, the trade would still be open with a profit of $1,878 at the close of day.

In Conclusion

If a trader is shorting Bitcoin, Ethereum, Ripple, Litecoin, or any other cryptocurrency, they are taking a bearish view on its price. By going short on a cryptocurrency CFD, the trader is aiming to profit from a falling market. This is just one benefit of using CFDs to short cryptocurrency - you can profit from the rising and falling markets.

Accounts such as the Trade.MT5 account enable cryptocurrency traders to access advanced and secure platforms such as MetaTrader 5, as well as add-ons like the MetaTrader 5 Supreme Edition plugin. This helps traders in their decision making process by providing advanced trading features that can be used to trade with cryptocurrency. After all, cryptocurrency is now a very popular market to trade in, if you have access to the right products and platforms to do so.

So if you're interested in trading CFDs on cryptocurrencies, and have become inspired as a result of reading this article, you can apply your newly found knowledge directly to the live markets today with a trading account from Admiral Markets. Click the banner below to open your account today!

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Jitanchandra Solanki
Jitanchandra Solanki
Financial Markets Author, Admirals London

Jitanchandra is a financial markets author with more than 15 years experience trading currencies, indices and US equities. He is an accredited Market Technician with a BA Hons degree.