How to Bet Against Bitcoin

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Although bitcoin has had a significant sell-off in 2018, the most popular cryptocurrency is still largely up after gaining over 1,000% in 2017. We decided to review the various methods of how to bet against bitcoin or “short” the all-star cryptocurrency:

  1. Short GBTC bitcoin Trust
  2. Short XBT bitcoin futures
  3. Short BTC bitcoin futures

Until an actual bitcoin ETF is developed, these three methods of shorting bitcoin are the best options for US residents. Shorting bitcoin directly via an unregulated cryptocurrency exchange is risky and not recommended; it’s best to stick with ETNs and futures.

Key Points

  • Bet against bitcoin using an ETN if you don’t want to signup for futures trading
  • Bitcoin ETN trading (exchange traded note) (GBTC) operates during normal stock market hours and fuctions like a stock or ETF
  • Betting against bitcoin by shorting XBT or BTC futures is highly liquid and easy
  • XBT and BTC futures trade almost 24/6
  • TradeStation is the best broker to trade bitcoin futures

Why It’s Risky to Short Bitcoin Using Bitcoin

This might sound confusing, but there is technically added risk if you try to short bitcoin by using bitcoin. For example, the moment you convert your US dollars into bitcoin, you are now tethered to the price of bitcoin.

While you can buy put options or short bitcoin futures with overseas cryptocurrency exchanges, if the price of bitcoin continues to plummet, the value of your bitcoin holdings will decrease.

Since you’re trying to bet against bitcoin, this is highly counterintuitive. The safest way to short bitcoin is with CME or CBOE bitcoin futures in a regulated brokerage account in the US – period.

ETF vs Futures for Betting Against Bitcoin

Deciding to short (bet against) bitcoin via an ETN or futures depends mostly on your risk tolerance and investment objectives. For most traders and investors, shorting a bitcoin ETN will be faster and easier.

There’s literally less electronic paperwork involved. For futures, however, because margin requirements are very low compared to notional value, large futures positions can be put on without large amounts of capital. This means both profits and losses can mount very, very quickly.

If you want to bet against bitcoin quickly and with a lot of leverage, XBT bitcoin futures are your best option.

If you are comfortable with the added leverage, futures are a very convenient way to trade bitcoin, because you can trade bitcoin virtually 24/6 and not have to create a digital wallet with a crypto exchange.

This is a chart of XBT bitcoin futures since inception:

How to Short Bitcoin Using Futures

This is a chart of GBTC for the past six months:

How to Bet Against Bitcoin using an ETF

How to Bet Against Bitcoin using an ETN

If you don’t want to open up a futures trading account, because maybe it doesn’t fit your risk tolerance or investment objectives, shorting GBTC is the way to go.

Because GBTC is an OTC security, many brokers don’t allow their clients to short it and it can be difficult to find available shares for the short sale. Ally Invest is a great broker that lets their clients trade GBTC.

Fast facts about shorting GBTC

  • GBTC exclusively holds bitcoin, about 170,000 to be exact
  • GBTC often trades at a premium it’s holdings
  • Andrew Left, a notable shortseller, has sharply criticized GBTC for trading at an intense premium to bitcoin
  • See a more detailed review of how to short GBTC

How to Bet Against Bitcoin Using Futures

If you want to be plugged in to the bitcoin market nearly 24/6 without actually having to trade bitcoin, then bitcoin futures are the right instrument to trade. TradeStation is the best broker to trade bitcoin futures, because they have the lowest pricing and lowest margin requirements.

Currently, there are two exchanges offering bitcoin futures: the CME and the Cboe (Cboe has rebranded its futures exchange as CFE). The Cboe (CFE) was the first US futures exchange to offer bitcoin futures.

Cboe bitocin futures trade under the ticker symbol “XBT”. Because they were introduce first, XBT futures typically trade more volume than the CME BTC bitcoin futures.

That is why we strongly recommend trading XBT bitcoin futures as opposed to BTC futures. There is better liquidity and more volume with XBT.

Difference Between CME BTC futures and Cboe XBT futures

Although it looks confusing at first glance, BTC and XBT futures are basically the exact same thing. Check out this blog post for a more detailed breakdown between BTC and XBT futures.

Basically, XBT futures represent 1 bitcoin and BTC futures represent 5 bitcoins. It’s as simple as that. Margin requirements for XBT and BTC futures vary and are initially set by the exchanges and then passed on to the brokers. Brokers then pass on the margin requirements to clients.

Final Thoughts

If you’re going to bet against bitcoin, which is a very large part of the cryptocurrency movement, make sure you are cash-strapped and well prepared. The number one rule of short selling is ensuring you have enough capital to withstand anything – don’t forget that.

Markets can and often do act very irrationally. If you short 10 shares of GBTC and use all of your available buying power, what happens if GBTC inches higher and you are forced to cover your position? This happens to short sellers time and time again, so be prepared for the market to move against your position.

Timing the market is never easy, but when you’re short, your timing has to be excellent, otherwise you’re going to get destroyed. I always keep my short positions small and nimble, so I can scale into and out of them at a moment’s notice; with the volatility of bitcoin, this is even more true.

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