As the price of Bitcoin continues it's downward journey, we are finding more people start to ask if there are ways to 'short' Bitcoin. A short position involves selling an instrument you do not own. You are betting that the price will fall, at which point you close your trade at a profit by buying back the amount you initially sold.
Can this be done with Bitcoin? The "short" answer to this question, is 'yes'. It is very easy to short sell Bitcoin One company we found which offers the ability to trade both long and short positions on Bitcoin this is CFD provider Plus500.
At this stage, they only provide one instrument, which is based on the USD/BTC price. Traders can open either short or long positions with this CFD, and it offers a leverage ratio of 1:17. This means that for every dollar you have on deposit, you can gain an exposure of up to $17 worth of Bitcoin.
Trading is as easy as watching a chart, and pressing either buy or sell
Plus500 expresses prices of CFDS in the form of a buy sell spread. At the time of writing, the spread on the Bitcoin CFD was $2.80, and the CFD price was; Buy: $206.20 Sell: $203.40.
The only fee charged by Plus500, is a maintenance fee, which is expressed as a percentage, and charged once a day at a predetermined hour. Plus500 expresses this in your own local time.
For the instruments we looked at, the times fees are charged in our time zone are:
- 6:00am for Bitcoin
- 6:00am for AUD/USD
- 1:00pm for Gold
The daily premium charged varies between instruments and is expressed as a percentage
- Bitcoin premium is 0.10% both buy and sell
- Gold premium is 0.014% both buy and sell
- AUD/USD, the buy premium is 0.0190%, and the sell is 0.0160%.
The difference in buy sell premium on the forex instrument, is due to interest rate differentials and other factors which influence the borrowing costs associated with investing in two currencies at the same time.
There are two main advantages to trading with CFDS:
- Market Exposure - Despite being located in Australia, I can easily invest in international shares, commodities, foreign exchange and a whole lot of other markets, including Bitcoin. Investing directly into these markets as an individual, would be very difficult, specially if they are overseas or require large sums to open an account.
- Leverage (click for TFG definition) - The borrowing side of CFDs is very similar to how a margin loan works. The interest on the loan, is built into the daily premium. The leverage available varies depending on which instrument you are looking at. In the details section of each CFD, you will see a leverage ratio
In our hypothetical case, we are looking for ways to short sell Bitcoin, Plus500 has that covered so we have found the market exposure we were looking for. The next question is 'how much can we invest?', which depends on the amount of leverage available
To find out how much we can borrow we looked at the details section of each CFD, and found the 'leverage raio'. the leverage ratios were:
- Bitcoin - 1:17
- Gold,- 1:152
- Bitcoin - 1:17
We are looking at Bitcoin which has a ratio of 1:17 this means that for every $1 you have of available funds on deposit, Plus500 will let you invest $17 in Bitcoin (with either a short or long position)
Leverage gives us the ability to magnify our market exposure. If you wanted to buy one contract at $206.20, you would only need to use $12.33 of your own funds. Conversely if you wanted to sell one contract at $203.40, you would only need to use $12.16 of your own funds.
Any returns you experience will also be intensely magnified due to the leverage. This means that investing through CFDs greatly increases the financial risk involved with any trade.
A Hypothetical example
The table below, shows the cash flows, if we were to open a Bitcoin trade for 3 contracts, then close it at a price of $200 after one day. We have shown the impact of both long and short positions.
No trades were placed, and we don't know if the price ever hit $200, we aren't great at predicting the future :)
With a price of $200, the price has fallen 3.01% from the buy price of $206.20, and has fallen 1.67% from the sell price of $203.40. You would expect that someone who was long would lose 3.01%, and someone who was short gained 1.67%. Both positions incur a small holding cost (we assumed that the clock hit 6:00am over the course of our trade).
However due to the impact of leverage, the long position has lost 52.82% of their initial deposit, while the short position has a gain of 26.72%. This huge magnification of both gains and losses, is part of what attracts so many traders to CFDs, and also what makes them so risky.
Want to see how the trade would look using different entry and exit points? We've created a calculator just for you!
If you are interested in CFDs, either as a way to gain exposure to Bitcoin, or to invest in any of the thousands of instruments available, then Plus500 is worth having a look at. We have traded with their web app, as well as their Android and iPhone apps, and find the interface very easy to understand and to use.
Plus500 offers a demo account which never expires, and offers full access to all of their services. This demo account is a great way to test your strategies before putting any real money at risk :)