Bitcoin has drawn a huge amount of hype, with some investors making incredible profits from it. The price has varied wildly since its launch, with each new peak followed by an immediate dip in value. At the press time, Bitcoin is trading at $16,382 level, according to the Coinbase. While some are convinced this digital currency has still yet to reach its maximum value, others feel like Bitcoin is a bubble comparable to the 17th Century Dutch mania for tulips or the 1990s craze for Ty Beanie Babies.
JP Morgan CEO, Jamie Dimon, is one of many Bitcoin skeptics, declaring the cryptocurrency a fraud and a bubble that was sure to burst sooner or later. So far, he has been wrong. However, if you agree with Dimon and think that Bitcoin’s value is sure to collapse at some point, here’s how to make money shorting Bitcoin.
The most straightforward way to short Bitcoin is through buying derivatives. This is a relatively new concept in the world of cryptocurrency and there are few options for doing it at present. However, these options look set to increase as Bitcoin’s ever-increasing hype leads to more skeptics looking to short it.
The only current option for doing this is through Hong Kong’s Bitmex exchange. Traders can buy a “put option” through Bitmex to sell Bitcoin at peak pricing. If the price then decreases, traders will make a profit on the put option.
Options for Bitcoin and other cryptocurrency derivatives look set to explode with LedgerX. LedgerX has already been approved by the Commodity Futures Trading Commission to operate as a cryptocurrency clearinghouse. LedgerX is offering a range of swaps and derivatives, making it easy for anyone to bet against Bitcoin’s future success.
2. Place a Bet
For big-time investors, major investment banks will draw up a contract for shorting almost anything. The obvious drawback is that firms such as Goldman Sachs won’t negotiate these kinds of deals with anyone who walks in off the street.
If you think cutting a deal with a major investment bank is beyond you, you could always turn to a traditional bookmaker. Like investment banks, bookmakers will allow a bet to be placed on almost anything. You might not get fantastic odds on a long-term bet on Bitcoin’s value dropping but it might be worth placing a bet if you’re convinced cryptocurrency is destined to fail.
3. Buy Bitcoin on Margin
Some Bitcoin exchanges allow users to trade Bitcoin on margin. This functionality is intended to allow users to bet on the cryptocurrency’s long-term success, but it can easily be tweaked to allow for shorting Bitcoin.
Using an exchange such as GDAX or Kraken, Bitcoins can be sold on margin. The deal will be completed later when the value has hopefully decreased.
The main drawback of this strategy is that it only allows for short-term selling on margin. Through GDAX, margin positions can only be left open for a maximum of 27 days. Of course, if the price of Bitcoin increases during this time, the user is liable for the new higher price.
Through GDAX, this option only really exists for big-time investors, with a minimum of $5 million required for margin trading. Kraken is a better option for most traders, as it doesn’t have this steep financial barrier to margin trading.
4. Short Bitcoin-Connected Shares
While directly shorting cryptocurrency is currently fairly difficult, there are ways to indirectly bet against Bitcoin.
The Bitcoin Investment Trust currently trades on pink-sheet Over the Counter (OTC) markets, allowing investors to profit from Bitcoin’s success without negotiating the complicated technical aspects of buying Bitcoin directly. Shorting their stock is difficult, however, as most major brokerages don’t allow investors to short pink sheet stocks.
As with options for trading in Bitcoin derivatives, options for shorting Bitcoin investment groups will likely increase in the near-future. The Winklevoss twins had an application for a Bitcoin exchange-traded fund rejected by the SEC in March 2017. While that attempt failed, it’s probable that other similar ventures will attempt to get licensed.
Another option would be to bet against publicly-traded companies that are heavily invested in Bitcoin’s success. For example, chip-maker Nividia is one of the biggest firms supplying Bitcoin miners with the tools they need to generate the cryptocurrency.
5. Bet Against Bitcoin Believers Directly
An unorthodox option for shorting Bitcoin would be to make direct one-to-one bets against the cryptocurrency’s biggest supporters. Tracking down Bitcoin supporters is easy, with many forums dedicated to dissecting the latest crypto news and trends. Making a bet is less easy and requires a degree of trust.
That doesn’t necessarily mean you need to trust the other person to honor the bet. Other blockchain-based cryptocurrencies make it possible to set up a wager that will automatically pay one party if the conditions of the bet have been satisfied.
The Ethereum blockchain platform has been generating a lot of buzz through allowing for the creation of “smart contracts.” Smart contracts automatically transfer funds from one party to another when the pre-set conditions of a deal have been met.
This option requires some technical knowledge of using Ethereum and setting up smart contracts. If this can be done, using smart contracts to make direct one-to-one bets may be the best way to bet against Bitcoin’s continued success.
It’s worth remembering that Bitcoin is still less than a decade old and most people are still completely clueless about exactly what this technology is and what it’s capable of. It’s an open question whether Bitcoin and other cryptocurrencies have any inherent value or whether they’re products of investor hysteria, just like Dutch tulips and Ty Beanie Babies.
If you’re convinced that Bitcoin is a bubble, you might feel a bit like a character from The Big Short, completely confused as to how so many people seem oblivious to the financial implosion waiting around the corner. In The Big Short, a huge amount of effort is put into shorting the American sub-prime mortgage bubble and a few people get very rich as a result. Finding a way to bet against Bitcoin might just be equally as rewarding.
THE FINE PRINT: This material is for informational purposes only and should not be construed as investment advice. It is not a recommendation of any particular strategy or investment product. Our views and opinions expressed in any online content are current at the time of publication and are subject to change. All investment involves risk, including the loss of principal.