Bob Mason
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bitcoin crash

Bitcoin has continued to grab the headlines throughout the year and with good reason. Year-to-date, Bitcoin has surged 1,053% to $11138 at the time of writing. That’s quite an impressive return for any investor, particularly when considering the fact that it had fallen to a 2017 low of $1,830 in mid-July of this year.

The gains through the last month have also been quite spectacular, with Bitcoin surging to more than $2,000 in just 4-days in late November to break $10,000 and then break into $11,000 levels in just one single day.

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Bitcoin has seen somewhat of a cult following and the level of support is quite significant. It’s been a choppy few days however and, having fallen back to $9,000 at the end of November, support levels needed to kick in to drive its bounce back to $11,138.

The moves are quite significant and as with any asset class, once the volatility begins to pick up, following significant gains, the choppiness at the top may be indicative of an imminent correction.

While we have heard the bubble talk this year, as Bitcoin’s value surged alongside the more recently launched cryptocurrencies, the support levels to date have suggested that there may be no bubble to burst. After all, an intraday 20% loss in value would normally have been considered catastrophic. One can only imagine how the markets would respond to a 20% fall in the Dow Jones. A 4,800 point drop in a single day… In fact, the largest single-day drop in the Dow Jones’s history was on 29th September 2008, when the markets were in the eye of the global financial crisis storm. The Dow lost 777.7 points on that day, equivalent to a 6.98% decline. Granted there were other heavy losses, with the Dow ultimately falling from 14,000 levels to 6,600 levels by mid-March 2009, but the decline was certainly more orderly than Bitcoin’s flash crash.

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Why is Bitcoin so volatile?

For Bitcoin, the recent volatility has been driven, not only by the exponential gains this year but also over the likelihood of hard forks in the coming months that raises a degree of uncertainty over Bitcoin’s future.

Bitcoin has experienced two hard forks already this year that have resulted in the creation of Bitcoin Cash and Bitcoin Gold. While both have managed to co-exist with Bitcoin, the level of interest in Bitcoin’s offshoots has waned, with Bitcoin Gold sitting close to initial valuations and Bitcoin Cash seeing little chance of racing to new record highs anytime soon. But, in each instance, Bitcoin experienced an initial surge in demand ahead of the hard forks, followed by a dip, as investors moved into Bitcoin in order to qualify for receipt of free coins from the Bitcoin hard forks. Upon release of the coins and the acceptance of the new cryptocurrencies on exchanges, an increase in demand was seen early before investors locked in profits and moved back into their preferred currencies, Bitcoin continuing to be the leader of the pack by some margin.

Some trading patterns have evolved through the hard forks and speculation of further forks in the coming months and with it comes the opportunity to trade Bitcoin, not only on the rise but also on the decline.

The cryptocurrency markets have certainly evolved, with Bitcoin exchanges providing investors with CFDs, margin, Bitcoin ETFs and Funds, short-selling and even the launch of the CME futures market in just over a week’s time.

While the launch of the futures market is expected to result in a material increase in institutional money that would normally support Bitcoin’s continued rise in value, the increased numbers will also lead to a greater number of Bitcoin bears looking to push the price down. The Bulls have rallied behind Bitcoin this year, but the bears are beginning to make themselves known and with it, the opportunities to benefit from Bitcoin declines are rising.

The prospects of further hard forks are likely to provide the greatest number of opportunities to investors who are looking to take advantage of a Bitcoin collapse. Bitcoin’s famed decentralization may ultimately lead to its demise, as the market looks to the fact that other cryptocurrencies benefit from some form of leadership for technological advancements, protecting them from the offshoots seen from the recent Bitcoin’s forks.

Investors will also consider the fact that Bitcoin is looking to dethrone the banking system and provide an alternative and for this reason will likely receive the heaviest blow should governments and central banks decide that enough is enough and regulate. Bitcoin’s end of November slump came off the back of Nobel Prize Winner and top economist Joseph Stiglitz’s calls for a ban on Bitcoin.

Clearly, there are many willing to jump ship and with little pressure to do so. Looking fixedly at the Bitcoin Buy button may prove to be costly for those looking to get onto the Bitcoin wagon. For the more savvy investor, the option to short sell brings with it the prospect of, not only locking in this year’s gains but also look to benefit from any price collapse, at the right time of course.


How Can you Short Bitcoin?

Short selling provides investors with that very opportunity. Short selling is where an investor sells an asset, in this case, Bitcoin, at current market value, essentially borrowing the asset to sell from a person or agency, and at a later date, buys back the asset. Here the investor will be wanting to buy back the asset at a cheaper price than it was sold for, providing the investor with profit from the loss in value.

For example, an investor short sells 10 Bitcoins at a current valuation of $11,000, giving the investor $110,000. The value of Bitcoin then falls to $8,000 and the investor buys back the 10 Bitcoins at the new value of $8,000. The investor had essentially borrowed the $100,000 to short sell the Bitcoins at $11,000 each, so the investor then pays back the borrowed Bitcoin sales proceeds but based on the new valuation, which means a total repurchase price of $80,000. That’s a $30,000 profit.

For the bolder investor, the availability of margin means that there is the option to increase the size of the short sell-through leverage to boost profits by as much as 20 times. In the case of the above example, that would have given a profit of more than half a million Dollars. If you’re on the wrong side of the trade it could go horribly wrong however and for that very reason, such trading practices do require the use of stop-loss limits and sufficient liquidity to manage any margin calls in event that stop-loss limits have not been triggered, but trades are on the wrong side.

With the availability of short selling on a number of Bitcoin exchanges, there are four popular methods to short Bitcoin.

Margin Trading: The easiest of techniques to short sell Bitcoin is via Bitcoin exchanges that offer margin trading. This has become particularly common across the exchanges. Investors are allowed to borrow money from the respective broker to make the trade. With the use of leverage, earnings or losses are then enhanced. Margin trading platforms are now available across a large number of Bitcoin exchanges, including AVAtrade and Plus500 *(76.4% of retail CFD accounts lose money, Availability subject to regulation).

Futures Market: While buying a futures contract is for those expecting Bitcoin to gain value, investors can also sell a futures contract. Selling a futures contract is done when the expectation is for the value of Bitcoin to fall. With Bitcoin’s futures market evolving rapidly, this will be one of the more preferred short selling techniques used by investors.

Prediction Markets: Relatively recent to the crypto world, prediction markets gives those looking to make money on Bitcoin’s downside to make a wager on the possible outcome of an event, in this case, a fall in Bitcoin price by a particular percentage of value

Short-Selling Bitcoin Assets: As in the example given earlier, this is the selling of borrowed Bitcoins and buying the Bitcoins back at the lower price, booking the difference in selling and buying price as profit.

Away from CFDs and the above techniques for short selling Bitcoin assets, the existence of ETFs and Funds invested in Bitcoin also provide the opportunity to short sell and make returns on Bitcoin declines. Both Long and Short ETFs have been established and filed with the Securities and Exchange Commission in the U.S in anticipation of the launch of the CME futures market likely within the next two weeks. Investors will be able to bet against Bitcoin by investing in Bitcoin ETFs that are betting on a decline. Hedge funds are also be getting in on the action and the futures market will certainly make Bitcoin investing an even more interesting experience in the months and years ahead.

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If Bitcoin Crashes, Sell!

It goes without saying therefore that if investors are holding Bitcoin, selling at the right time is paramount. We have seen in recent days just how quickly Bitcoin’s price can fall and it wasn’t long ago that Bitcoin was at sub-$3,000 levels ahead of the Bitcoin hard fork in the summer. The more forks, the greater the uncertainty and then there is regulatory chatter for investors to consider. Bitcoin investors are particularly sensitive to both, so there will be an opportunity to short Bitcoin, but timing is everything.

Price corrections are particularly rapid and Bitcoin could fall by 20% or more in a matter of hours, so to catch the downdraft to either lock in long profits or to short Bitcoin is through a small window of opportunity.

Bitcoin exchanges that investors should turn to when looking for short Bitcoin include Plus500. CFDs continue to rise in popularity and with the continued speculation over whether Bitcoin is a bubble ready to burst, will likely see popularity rise further going forward.

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