Short selling is an advanced trading strategy popular across all financial markets, including cryptocurrencies. While it can be a way to profit from a downtrending market, it's not suitable for everyone.
You should have a strong grasp of trading and investing and an understanding of order types, candlestick charts, collateral and margin requirements before you get started.
This is not an endorsement of cryptocurrency or any specific provider, service or offering. It is not a recommendation to trade or use any services.
How to short Bitcoin
To short-sell Bitcoin, you'll need a trading account and a clearly mapped-out trading strategy.
Open an account with an exchange. To short Bitcoin, you must have a trading account set up that offers peer-to-peer trading. This means there is an order book with traders posting bids and offers instead of a broker that only allows basic buying and selling.
Understand short-selling risks. Short selling is typically associated with the use of leverage. If you plan on trading using leverage, ensure you have the appropriate risk management strategies, including stop losses, correct position sizes and adequate collateral.
Trade execution and management. Do not enter a trade blindly. Before executing your position, you should have mapped out your entry and reason for entering, your potential profit target or targets and a stop-loss zone calculated to suit your risk profile.
Stick to your plan. Always stick to your plan and never enter a trade blindly. Focus on mastering one set-up and strategy, such as trend trading on the 15-minute chart. This will allow you to be comfortable and confident in your executions and give you the ability to spot set-ups more regularly.
Take breaks. Day trading and scalping are extremely high intensity and require high levels of focus. Take the appropriate breaks if you're actively trading. The crypto market never sleeps, so there's no need to feel like you're missing out.
💡 Trading tip: Many crypto exchanges offer demo or simulation trading accounts where you can practise short selling without risking any collateral.
How does shorting Bitcoin work?
Short selling is a popular trading strategy that involves selling an asset at a high price, ideally at the top of a range or resistance zone, and rebuying or closing the position as the price falls back to support, mean value or a downtrend.
Short sellers often use leverage to amplify position sizes. While this is common across crypto futures markets, leveraged trading is considered high risk and not recommended for beginners.
Many traders use technical analysis, charting patterns and indicators to assist this process and help understand when the market is overextended and due for a correction or likely to be rejected by a resistance zone and met by strong selling pressure.
Shorting Bitcoin can be done through a variety of different methods, including the following:
Spot margin. Margin trading allows you to borrow assets and trade with more than you hold. Your assets, for example, BTC or USDT, are held as collateral. If the market moves against you and a threshold is reached, you will receive a margin call – the broker will start selling your assets to cover losses and borrowing fees.
Futures trading. Shorting futures works similarly to spot margin in that it allows for leverage. However, unlike margin trading, you are not required to hold Bitcoin as collateral, nor are you trading physical Bitcoin. Instead, you are buying/selling a contract representing BTC and speculating on its future price.
Short selling can help you to capitalise on bearish trends, pullbacks and trade mean-reversion set-ups.
It can be done on any time frame from the 1-minute chart to the weekly and is suitable for a range of trading styles, including scalping and swing trading.
Can you short Bitcoin in Australia?
Traders looking to sell Bitcoin and rebuy for a profit can do so on any centralised or decentralised exchange that supports BTC margin or leveraged trading.
Futures trading and shorting on leverage are not allowed in some jurisdictions due to regulatory restrictions.
If you plan on shorting BTC, trading on platform that is registered with AUSTRAC or ASIC is recommended. These exchanges often have better security measures in place and even insurance policies in the event of a hack or stolen funds.
What you need to know before shorting Bitcoin
Shorting any market and trading on leverage can be complicated and is considered high risk. Before shorting Bitcoin, familiarise yourself with the following concepts and tools to help better understand what's happening behind the scenes of your trade.
Margin or leverage trading involves borrowing funds from an exchange to amplify your trading balance. To borrow, you must first deposit assets to be used as collateral. All exchanges have a cap or limit on the margin or leverage available. For example, a limit of 10x will allow you to leverage a $1,000 account and trade with $10,000. In this instance, 10x is the maximum position size you can open; however, there is no minimum trade size – you can open a position with no leverage or even less than your collateral balance. The higher the leverage, the higher the risk, as profits and losses are amplified.
Your maintenance margin is the minimum margin balance required to keep your position open.
Your margin ratio calculates how much collateral you have available and when liquidation will occur. Margin ratio = maintenance margin/margin balance.
A margin call occurs when your margin ratio exceeds a certain threshold. You will typically receive an alert or email notification from the exchange prompting you to close your position or add more collateral to avoid liquidation.
Liquidation occurs when your margin ratio reaches 100%. Your leveraged position will be forcibly closed by the exchange. Positions are generally liquidated in increments. Avoiding liquidation and closing positions is recommended if a margin call is received, as liquidation fees are often high and can be around 5%.
A cross margin allows you to share margins between open positions and can help reduce liquidation risk. For example, you have 2 open short positions, one on BTC/USDT and another on ETH/USDT. The BTC position is positive 80%, and the ETH position is negative 80%. By utilising a cross margin, your margin balance will be offset and neutral. In addition, a positive cross-margined trade will allow you to use the additional unsettled collateral to open a position on any other unassociated trading pair or add additional size to your positive trade.
If you were using an isolated margin in the example above, you would risk liquidation on your ETH position if the price continued to rise, as your positive BTC position would not be offset as the collateral needed to maintain an open position.
Stop losses are a crucial component of risk management and should be used in all trades, especially leveraged positions. Stop losses are a predefined closing point should a trade run offside. By using stop losses, you will know how much you're risking per trade before entering and can construct a trading plan in line with your risk tolerance.
Liquidity is the total value of resting bids and offers sitting in the order book. Trading markets with low liquidity on size and leverage can be risky – if not managed correctly, slippage can drastically impact PnL. Bitcoin is typically the most liquid crypto market, along with Ethereum. However, liquidity will vary from exchange to exchange.
If a market has low liquidity and you buy at market price or are stopped out of a trade, your order will be executed immediately at the best available price. If liquidity is low, the best available price may not be optimal, resulting in an instant offside trade or a larger-than-expected loss – this is known as slippage.
Maker and taker fees are charged depending on what order type is executed. Limit orders are charged as maker fees. You will be charged lower rates by acting as a market maker and adding liquidity to the order book, benefiting the exchange and other traders. Market order fees are higher as you're penalised for removing liquidity from the order book and are considered a market taker.
You open a short position on BTC/USDT. You use $1,000 USDT as collateral and leverage it 10x, short selling $10,000 worth of BTC.
If BTC falls 10% and your profit target is hit, you stand to make approximately $1,000.
(10% of your initial investment * 10x leverage minus any exchange/borrowing fees).
However, if the price of Bitcoin rises by about 9% and your maintenance margin threshold is exceeded, your position will be liquidated incrementally, potentially leaving you with nothing.
To avoid liquidation, always remember to use a stop loss. Stop losses for short trades are often placed above the previous swing high. Swing highs will differ drastically based on your trading time frame and current market volatility. Calculate stop losses prior to entering the trade by using a PnL calculator or a percentage price measurement tool.
Short set-up chart example:
Bitcoin breaks down from a trading range on the 15-minute chart. Enter position with a stop loss placed above the range low. Depending on your trading strategy, you could take profits at numerous targets, including a test of the next support zone, the tag of a moving average or the break above the downtrend line and the signal of a momentum shift.
Key short-selling considerations:
If you are trading futures, you are not trading BTC, merely a contract speculating on its future price.
If you are trading margin, you are trading physical BTC with additional funds borrowed from the exchange. Your USDT or selected crypto balance will be used as collateral.
Maintenance margins and liquidation zones will differ depending on whether you choose a cross or isolated margin.
Stop-loss placement can be difficult, and there is no perfect stop-loss position. Consider using an indicator such as the Relative Volatility Index (RVI) to calculate the average price swings over a selected time frame and plan your exits accordingly to current market conditions.
Common ways to short Bitcoin
You can short Bitcoin in many different ways depending on your risk profile and preferred trading strategy. We've covered some of the most popular options below:
1. Futures market
Futures contracts are a form of derivatives that allow traders to speculate on an underlying asset's price movement without holding the asset itself. They are often traded using leverage, meaning profits and losses are amplified.
There are 2 main types of future contracts. While they are similar, there are key differences that should be noted and understood.
Quarterly futures contracts have a fixed expiration date of 3 months. If this date is reached and you're still holding size on your trade, your position will be forcibly closed by the exchange regardless of whether it is in profit or loss.
Perpetual futures contracts, or "perps" are the most popular way to short Bitcoin, with billions of dollars' worth of futures contracts bought and sold daily. Perps are traded the same way as regular futures, with the main difference being that the contracts do not have an expiration date and can be held indefinitely.
Futures and leveraged trading are recommended for advanced users. Mismanaged trades have the potential to unravel quickly and your collateral can be liquidated (taken by the exchange to cover losses).
These products and services are not available to Australian residents
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2. Spot margin trading
Getting started with spot margin trading is simple and can be used to amplify your profits using leverage. Keep in mind that this works both ways, and losses will depend on how you manage your risk and stop loss.
Once you have opened and funded a margin account, you can borrow collateral and start trading. Most exchanges offer 3–10x leverage. You will see some exchanges that offer more than that, but these should be reserved for experts only, as every additional point of leverage increases your risk.
Assume you have a $10,000 account size and leverage it 3x – you now have $30,000 to use for your trades.
If you sell 1 BTC for $30,000 and the price decreases to $27,000, you stand to make about $3,000 profit, as opposed to $1,000 if you had not leveraged your account.
Inversely, if the price of Bitcoin rises and you do not have a stop loss in place, your entire trading account could be forcibly closed and your collateral liquidated.
Borrowing fees, trading fees and slippage should also be considered when trading spot margin.
Pros
Profits can be amplified when trades are successful.
You can hold the BTC you're trading as collateral – unlike derivatives.
Simple to get started and supported by most tier-1 exchanges.
Cons
Access to less leverage than futures trading platforms.
Borrowing rates can add up for long-term trades.
Mismanaged trades can be liquidated.
3. Using Bitcoin CFDs
Disclaimer: CFDs and forex are complex financial products that come with a high risk of losing money. Most retail client accounts lose money trading CFDs and forex. Consider whether you can afford to lose your money.
Bitcoin CFDs or contracts for difference are similar to futures trades in that your PnL is calculated based on the difference in price between the time you open and close your position.
The key difference is that CFDs are settled in fiat currency, not digital stablecoins or cryptocurrencies such as USDT or Bitcoin.
CFDs are traded through traditional financial brokers rather than on centralised or decentralised cryptocurrency exchanges. They are considered high-risk investment vehicles and should only be used by experienced traders.
A popular CFD trading strategy is what's known as hedging – holding both long and short positions simultaneously. If you're holding an open futures long position, you could short Bitcoin CFDs hedging your trade and mitigating risk. If the trade is managed correctly, one position will remain in profit regardless of market conditions.
However, hedging is a complicated strategy and not recommended for beginners as it typically does not involve a stop loss. Calculating risk can also be complicated.
Trades are settled in fiat currency, removing the need for crypto wallets and on-chain transactions.
Bitcoin CFD short trades can be used to hedge open long positions.
Cons
Bitcoin CFDs are traded via centralised brokers and are a high-risk form of trading.
Unlike perpetual futures, CFDs have an expiry date and cannot be held indefinitely.
4. Binary options
Options are derivatives contracts that come in 2 forms: calls and puts. Put options allow you to short Bitcoin by speculating that the price will drop, similar to a futures trade.
However, unlike futures, losses are limited to the purchase price of the options contract and cannot rise or fall indefinitely.
To short Bitcoin, you would purchase a put option that would give you the option, but not the obligation to sell Bitcoin at today's price at a later date. The purchase price is referred to as the strike price.
Options are often used to hedge positions – trade both long and short positions simultaneously to help mitigate risk.
Options can be complicated and are recommended for advanced traders or those with a background in traditional financial instruments.
Options can help mitigate risk by hedging positions.
Bitcoin strike prices typically run in $500 increments trading at whole values can simplify calculations.
Cons
Opening an options position is not the same as using a typical limit or market order type and can be complex.
There are not a lot of trading platforms for crypto options.
Mismanaged options trades can result in losses and expiry.
5. Leveraged tokens
Leveraged tokens are derivatives that traders can hold on crypto spot markets rather than futures-only exchanges.
Leveraged tokens represent a basket of perpetual contracts and move based on futures price fluctuations.
Unlike futures or margin trading, leveraged tokens allow you to short Bitcoin and other cryptocurrencies without the risk of liquidation or the need to monitor a maintenance margin.
By purchasing a BTCDOWN leveraged token, you can short sell with a targeted leverage range between 1.25x and 4x, helping to maximise profitability on downtrends and minimise losses during uptrends.
If the price of BTC falls, BTCDOWN will add leverage in an attempt to increase profits. Inversely, if BTC rises in price, your leveraged token will auto-rebalance, reducing the margin to cap losses and avoid liquidation.
Pros
Trade on leverage without the risk of liquidation.
Auto rebalancing leveraged positions amplify profits and minimise losses automatically – proper risk management and stop losses should not be discounted.
Leveraged tokens can be used to hedge futures market trades and mitigate risk.
Variable target leverage offers reduced volatility when compared with traditional leveraged trades.
Cons
Leveraged tokens mitigate some of the risk of a leveraged trade – they do not eliminate it and should be traded with the same risk management as any other strategy.
Leveraged tokens can be complicated to understand and are recommended for advanced traders.
Leveraged tokens are not available on all crypto exchanges.
6. Short selling BTC on the spot market
Short selling Bitcoin requires holding BTC on the spot market instead of using collateral such as USDT for leveraged trading.
As it is not a derivative market, it does not allow for leverage and is the lowest risk, lowest reward strategy. Spot traders can sell and rebuy Bitcoin for substantial gains if done correctly.
Spot market short-sellers are typically those who are holding Bitcoin long term. They will ride the trend up, sell near the top and rebuy for a gain or accumulate additional BTC as the market corrects. This may also be referred to as swing trading.
Although liquidation is not a concern, if the market moves against you, you may be forced to purchase BTC at a higher price than you sold it for.
Pros
No risk of liquidation
No funding fees
Hold the physical asset rather than a contract representing its price
Can opt to accumulate more of an investment or take profits in stablecoins
Cons
Leverage trading is not available
Spot market fees are typically higher than futures
Must have the capital available to make the initial investment
If the market moves against you, you may have to purchase at a higher price
Where to short Bitcoin in Australia
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What does it cost to short Bitcoin?
Taking a short position and the associated cost will depend on the exchange you choose to use and its fee structure.
Typically, taker fees are higher than maker fees as you're removing liquidity from the market instead of providing additional tradable funds.
Another consideration when trading on leverage is liquidation fees. This is the percentage the exchange charges as a penalty for exceeding your margin ratio. Liquidation penalties vary depending on exchanges. They are typically high, often 5% or more.
Market volatility and risk management are the most important factors when taking any trade. Only open a position with an exit strategy or stop loss set at an amount you're willing to risk.
When is the right time to short sell Bitcoin?
There is no ''perfect set-up'' for short selling, but there are some things to consider when planning your trades.
Choose a time frame. This is an important factor when trading any market. A move on a 1-minute chart that looks over-extended will most likely appear insignificant on a higher time frame such as the 1- or 4-hour chart. Choose a time frame and trade accordingly – perspective is key.
Patience. Crypto markets are volatile, so there's usually a trading pair experiencing price action. However, if the market is slow or your ideal set-up isn't there, don't rush into a trade.
Stick to your plan. Traders often lose money because they don't follow a structured trading plan. Practice set-ups on small sizes and figure out what works for you. If you find that mean reversion on short-term time frames works, then master that. If you're happy to wait a few days or weeks for a trade to play out, then learn more about technical analysis and swing trading.
Risk management. This is especially important when trading using leverage. Poor risk management can result in losing your entire account balance or "blowing up". It's good practice to use stop losses and plan how much you're willing to risk before entering a trade.
How is shorting Bitcoin different from investing?
Investing and shorting Bitcoin are different styles of trading.
Investors hold long positions, generally on spot markets or low-leverage position trades. Investors often trade without stop losses as the chance of liquidation for a low-leverage position is decreased. Spot market trades can fall drastically, but without leverage, there is no chance of liquidation.
Bitcoin short traders open positions, typically on leverage, expecting the price of BTC to fall or trend down. If the trade plays out favourably, the position is closed and a profit is realised. If the position runs offside, a stop loss should be placed and triggered to avoid substantial losses.
Trading Bitcoin comes with high risk, especially when leverage is added to a position. Things to consider before short selling Bitcoin include:
Market volatility. Crypto markets are prone to large price swings. Use an indicator such as the Relative Volatility Index to help assess the average swings. Size your positions and place your stop losses in accordance with price action.
Account size. If you're planning on opening a large position using a market order, you may experience slippage (the order being filled at a higher price than expected). Double-check the market's liquidity or scale into positions slowly.
Exchange. It is safer to trade on an AUSTRAC-registered exchange that offers a proof of reserves balance sheet or a DeFi platform that has been audited and has not experienced a hack.
Leverage used. Over-leveraged positions have the potential to go offside quickly. Make sure you've calculated your risk and know how much you're prepared to lose. Losses are inevitable. Do your best to remove emotions from trading.
Liquidation fees. Liquidation fees are much higher than trading fees (often upwards of 5%). Keep an eye on your maintenance margin and margin ratio. Close your trade, or post more collateral before liquidation occurs to avoid paying unnecessary fees.
Bottom line
Trading and investing of any kind have associated risks. Digital assets are considered especially risky as they are often more volatile than traditional assets, including high market cap stocks, FX and precious metals such as gold.
The risks of trading cryptocurrencies are amplified when using leverage. If trades are mismanaged, losses can quickly accumulate. Before short selling Bitcoin, it is important to have a firm grasp of trading spot markets, investing, volatility, margin and risk management.
Many exchanges offer demo trading accounts to help you understand the fundamentals before trading using your capital.
Disclaimer: Cryptocurrencies are speculative, complex and involve significant risks – they are highly volatile and sensitive to secondary activity. Performance is unpredictable and past performance is no guarantee of future performance. Consider your own circumstances, and obtain your own advice, before relying on this information. You should also verify the nature of any product or service (including its legal status and relevant regulatory requirements) and consult the relevant Regulators' websites before making any decision. Finder, or the author, may have holdings in the cryptocurrencies discussed.
Billy Endres was the cryptocurrency writer for Finder. He has a passion for Web3 and decentralisation technologies as well as cryptocurrencies. Billy’s background in software development helped open the door to the world of decentralised technologies, financial markets and technical writing.
There’s much to gain and lose in the volatile cryptocurrency market. If you want to make the best decisions, then you need to understand how to do a technical analysis. This guide from finder will tell you everything you need to know.
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