How to Long or Short Bitcoin

In a nutshell, bitcoin is either something as monumental as the introduction of the internet or as futile as the tech bubble of the late 90s. Bitcoin has been in the news for quite some time now, and over time, one begins to wonder if this is a bet you should be in on.

In a nutshell, Bitcoin is either something as monumental as the introduction of the internet or as futile as the tech bubble of the late 90s. Bitcoin has been in the news for quite some time now, and over time, one begins to wonder if this is a bet you should be in on. Yet, perhaps your ignorance of this new asset may hinder you from taking that first long/short position—everyone has got to start somewhere. This article has one sole purpose, and that is to increase your confidence in opening a Bitcoin position by going over the procedures and implications of opening a long or short position on Bitcoin.

The first step in taking a long or short position on Bitcoin is quite obviously to find a reliable exchange in which you will place your trades. Over the next few paragraphs I will outline my recommendations for which Bitcoin exchange is most suited for your needs. It basically comes down to whether you intend to long or short Bitcoin. If you’re bullish, read on; if you are bearish, skip ahead to the exchanges that offer margin trading.

How to Long Bitcoin

The official Bitcoin website (Bitcoin.org) has a total of 66 exchanges from which one can choose from. Narrowing down our search to US-based exchanges gives us three options: Coinbase, itBit, and Gemini.  To get straight to the point, Coinbase is your best option given its size, reputation, and security. Without even scrolling down, its homepage boasts several operating statistics and actual links to media coverage (you’d be surprised how many of those links turn into 404 errors when clicked on other Bitcoin sites). Coinbase has plenty to boast about as it is the first regulated Bitcoin exchange in the US and has exchanged over $20 billion in digital currency since its founding in 2012. 

Moving on to fees, Bitcoin exchanges charge a base fee in the form of a spread—meaning that there is a discrepancy between the bid (the price you buy at) and the ask price (the price you sell at). For example, with a spread of 50 basis points (0.5%), one could purchase BTC/USD at $100 and then sell immediately at $99.50, therefore the spread would be $0.50 for that trade. Among the several US-based exchanges, expect to pay a premium for Coinbase as their base fee is 50 basis points—25 basis points more than Gemini and 30 more than itBit. Pretty cheap, right? Yes, but of course, base fees are only a small portion of the fees you may be charged. Additional fees are charged on the basis of liquidity (maker vs taker), position size (the larger the position, the smaller the fees), and 30-day gross trading volume. The details of such fees are beyond the scope of this article; however, I would highly recommend taking a moment to review your exchange’s fee schedule. As a side note, I’d recommend taking a look at Gemini’s in-depth fee schedule with straightforward definitions and fee calculation examples.

How to Short Bitcoin

Taking on a short position is the complicated part. According to DC Forecasts, the most direct way to take a short position on Bitcoin would be to open a margin account and sell Bitcoins on margin. However, as you would probably expect, such a trade has its caveats.

The reality is, shorting on margin is becoming harder to come by for US-based, non-institutional investors. A little over a month ago (August 11th, 2017), popular international exchange, Bitfinex, announced the discontinuation of several of its services to US-based customers citing the high costs of legal and regulatory hoops to jump through. Reputable exchanges such as BitMEX and Plus500 have implemented similar restrictions as well. Yet, these brokers all have one thing in common, they are based internationally, and therefore the costs of serving US customers has outweighed the benefit.

The light at the end of the tunnel are two domestic exchanges, Coinbase’s GDAX and Kraken; two relatively new kids on the block with a very different client base. San Francisco based GDAX is perhaps the most promising of domestic exchanges with backing from the NYSE and brand-name venture capital firms Andreessen Horowitz and Union Square Ventures. GDAX isn’t targeting spare-bedroom day-traders, its targeting the institutional investors—think hedge funds and investment banks. Although widespread adoption of this exchange by institutional investors is still up in the air amid negative press from Wall Street’s finest, Jamie Dimon, Ray Dalio, etc., it has the potential of adding much-needed credibility, and thereby widespread adoption to the concept of cryptocurrencies. That said, don’t count on being able to open a margin account with GDAX unless you are willing to start out with a minimum deposit of $5 million. 

On the other hand, Kraken, a Bitcoin exchange also based in San Francisco, offers margin trading for the non-institutional investor (i.e. the minimum deposit is not in the millions of dollars). Kraken offers margin on four tiers ranging from $3,000 to $100,000. In addition, margin financing may not exceed a 28-day maximum financing term per US restrictions. Essentially, this means that you can only hold your short position for 28 days until you are forced to close out your position regardless of unrealized gains or losses.

If you are looking for other means to short Bitcoin such as futures, options, ETFs, or taking on a potential cross-hedge position, the complications increase substantially, as does the risk. The simple case is that reliable forms of these derivatives do not exist, yet. In some cases, such derivatives are not available to US investors. The aforementioned Bitcoin exchange BitMEX would be your best option for Bitcoin-related derivatives if you live outside of the United States or are willing to go through the trouble of setting up a VPN.

All in all, your best bet on shorting Bitcoin would be to open a margin account with Kraken and sell Bitcoin.  In assuming the reader is familiar with the concepts of margin and leverage, such a process is simple and logical. However, in the case that the reader is not-so-familiar with the concepts of margin (such as a margin call) and the potential for losses as a result of trading on margin, this is the part where I warn you dearly of the risks involved when combining ignorance, greed, an extremely volatile asset, and leverage. I would highly recommend doing your research and practicing on a cryptocurrency simulator before committing to a live trade.

About Nick M

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