Five Ways To Short Bitcoin

Looking to put bitcoin’s rise in context? How about this: Over the last five years, the world’s most valuable digital currency has risen an astonishing 11,000,000%. Furthermore, since Jan. 1, it has climbed 950%, compared with a total return of 18% for the S&P 500.

Given the torrid pace of bitcoin’s climb, one would imagine that there are few traders left who possess the wherewithal to short the digital currency. And until recently, the options to short bitcoin were mostly offered through unregulated exchanges, and very risky given bitcoin’s volatility.

But increasingly, mainstream exchanges have begun offering bitcoin-based derivatives that could make it easier for retail traders to short the digital currency. CME Group has said it will introduce a suite of bitcoin-linked products by the end of the year, and LedgerX, the first CFTC-approved Swap Execution Facility (or SEF), traded more than $1 million in bitcoin swaps and options during its first week.

In Switzerland, one exchange has introduced options that make it easier for investors to profit if the bitcoin price drops. But other more creative ways to short the digital currency have existed for a while now – in some cases, for years.

“All the options to short in common markets are becoming available in the bitcoin market,” said Charles Hayter, co-founder of market tracker CryptoCompare. “There’s pretty good liquidity for shorting bitcoin. The main difference with shorting the Nasdaq for example, is it will be a lot more volatile, so there’s a lot more risk. The rate to borrow will also be a bit higher."

With bitcoin on the cusp of breaking above $10,000 for the first time, here’s a list of popular options for shorting bitcoin, per Bloomberg.

Contracts for Difference

"One of the most popular ways to short bitcoin is through CFDs, a derivative that mirrors the movements of the asset. It’s a contract between the client and the broker, where the buyer and seller of the CFD agree to settle any rise or drop in prices in cash on the contract date.

'CFD is currently a great market if you want to short bitcoin, especially ahead of that milestone 10K mark, which we think will bring some retracement,' said Naeem Aslam, a chief market analyst at TF Global Markets in London, which offers the contracts. 'The break could push the price well above $10,100 and it would be in that area when we could see some retracement.'"

Margin Trading

"Another common way to short bitcoin is through margin trading, which allows investors to borrow the cryptocurrency from a broker to make the trade. The trade goes both ways; a trader can also increase their long or short position through leverage. Depending on the funds kept as collateral to pay back the debt, this option increases the already risky bitcoin trade. Bitfinex, one of the biggest cryptocurrency exchanges, requires initial equity of 30 percent of the position.

Short-margin trading positions on Bitfinex were at around 19,188 bitcoins on Monday, versus 23,931 long positions, according to bfxdata.com, which tracks data on the bourse."

Borrow to Short Bitcoin

"Most of the brokerages that allow margin trading will also let clients borrow bitcoin to short with no leverage. This will be a less risky way to bet bitcoin price will fall."

Futures Contracts

"The futures market isn’t as widely developed as CFDs and margin trading, but it’s still possible to make bearish bets on bitcoin with options. For now, LedgerX is the only regulated exchange and clearing agent for cryptocurrency options in the U.S. The CME Group Inc. and the Chicago Board Options Exchange have both asked for approval to list bitcoin futures, so that may open up the market to more investors."

Shorting Bitcoin ETNs

"Investors can also indirectly bet against bitcoin by shorting exchange traded notes with exposure to the cryptocurrency, like Stockholm-based Bitcoin Tracker One, and Grayscale Investments LLC’s Bitcoin Investment Trust. The risk is that these notes don’t always trade in line with bitcoin, so the exposure won’t be perfect."

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Yesterday, Citadel’s Ken Griffin opined that he believes bitcoin is a bubble that will end in tears, joining a list of finance luminaries who have all expressed reservations about the digital currency’s epic rally.

As a reminder:

$0000 - $1000: 1789 days
$1000- $2000: 1271 days
$2000- $3000: 23 days
$3000- $4000: 62 days
$4000- $5000: 61 days
$5000- $6000: 8 days
$6000- $7000: 13 days
$7000- $8000: 14 days
$8000- $9000: 9 days
$9000-$10000: ?

The rise is even making some central bankers nervous. “The problem with bitcoin is that it could easily blow up and central banks could then be accused of not doing anything,” European Central Bank policymaker Ewald Nowotny told Reuters.

But in his confirmation hearing earlier today, incoming Fed Chairman Jerome Powell said bitcoin is still too small to pose a real threat.

"They don’t really matter today," Mr. Powell said. "They’re just not big enough."

Comments

Midas 38BWD22 Tue, 11/28/2017 - 18:29 Permalink

I have been spending it all week long.  No fiat conversion.  Spending it.   Side note:  I think most of us realize the mental short-comings of buying something for the simple reason that it is going up.  (Tulip mania).  How about the other side:  Because it goes up every day it will have to fail catastrophically at some point.  Is that the same faulty logic?  I am asking for a friend.

In reply to by 38BWD22

Blue Dog Midas Tue, 11/28/2017 - 19:31 Permalink

During the height of tulip mania a single tulip bulb sold for as much as a house. That sounds great to me. Bitcoin to $200,000!!

62% of Bitcoin owners are in Japan. 21% in the US. South Korea is either 6% or 9%. It shows that Bitcoin adoption rates could go much, much higher as it spreads to other countries.

In reply to by Midas

greenskeeper carl 38BWD22 Tue, 11/28/2017 - 18:51 Permalink

I don't either. Im mainly a PM guy, but have recently bought a little BTC. When 'dumb money' like me buys in, that probably means the ride is over. But, I don't hate, and didn't buy in with anything Im not willing to lose. Same with the little I've kept in the miners. I pretty much gave up on that long ago, but I guess I just enjoy beating my head against the wall. The real stuff? Could not care less what the price does in the next month or next year or beyond. Prices can stay down here for years as far as Im concerned. As far as the crypto stuff goes, I don't think bitcoin et al are going anywhere anytime soon, but i DO think most of the money that will be made has been made, by people who got in on BTC, ETH early. Not saying they don't have further to run, and I do own a little of both, but I don't think we are looking at more 5000%/year gains. Just my .02 satoshis (haha).

In reply to by 38BWD22

francis_the_wo… Automatic Choke Tue, 11/28/2017 - 19:44 Permalink

"I might buy naked puts on Bitcoin"Sure, but the implied volatility part of the Black Sholes pricing model means you are going to pay a huge amount of premium.Also, would you want to be a market maker in Bitcoin on the CBOE?  Your goal as a market maker is to go home every night delta neutral (meaning you have offset all of your risk).  I don't see how this is feasible given the current volatility, especially in trading done while the US is asleep.

In reply to by Automatic Choke

mcbond silverer Tue, 11/28/2017 - 18:05 Permalink

Bitcoin will drop to ZERO many reasons: 1st - energy consumptionIn 2020 It Will Consume All The World’s Electricity  It will freeze allready  by end of 2018SO:Bitcoin: The Big Short! It can't survive technically - transaction rate now only at 3 per sec. - VISA: 10.000Conclusion:The Big Short Moment Approaches:http://www.btcpost.net/index.php/bitcoin-news/155-bitcoin-the-big-short

In reply to by silverer

Deep_Out-of-th… greenskeeper carl Tue, 11/28/2017 - 21:34 Permalink

That would sure fix the supply side of the demand/supply equation, although what do you suppose will keep the demand side alive? Currently, almost all bitcoins are purchased for the sole reason that "they go up", very few people are actually using them as a currency. Why would anyone in their right mind spend money that they know will be worth twice as much in 3 months? This is the reason central bankers do not like deflation, it stops people spending, therefore money loses its effectiveness as a means of exchange.

In reply to by greenskeeper carl

BarkingCat mcbond Tue, 11/28/2017 - 21:16 Permalink

Eventually it will drop to zero. I have always said that, however the trend right now is up, so Catch the Wave, make some money and get the hell out before it crashes.It does not matter if you are right. The reality is that the market does what ir does regardless.  

In reply to by mcbond

tmosley Juliette Tue, 11/28/2017 - 20:12 Permalink

They aren't redeemable, so they aren't dollar backed. You have to sell them on the open market, which means they should be trading at a discount. And worse, there is little proof that there are any long term dollars on deposit, not that it matters, because again, you can't redeem them.

In reply to by Juliette