The recent extreme volatility and the downward trend of bitcoin have many investors wondering how to make money from its potential collapse.
Here are five ways to do just that.
As a nod to the mainstream acceptance of bitcoin, the Chicago Board Options Exchange (CBOE) and the Chicago Mercantile Exchange (CME) launched futures for the currency last fall. Futures provide the investor the ability to buy or sell a contract.
A future contract is purchased if you are expecting the price of the underlying asset — in this case, bitcoin — to increase in value. Future contracts are sold with the hope that the price will drop in value. Selling a bitcoin futures contract is an efficient way to take a short position in its price.
First, let’s take a look at the futures offered by the CME. Traded under the symbol BTC, each contract represents five bitcoins. The minimum price fluctuation, or tic, is $25.00 per contract. Unlike bitcoin itself, which trades 24/7, the CME futures’ trading hours are 5:00 p.m. to 4:00 p.m. CST Sunday-Friday.
The CME bitcoin futures price is based on CME’s bitcoin reference rate. The reference rate is built on bitcoin prices across the significant spot exchanges between 3:00 p.m. and 4:00 p.m. London time.
On the CBOE, bitcoin futures have the symbol XBT. The major difference between XBT and BTC is that XBT’s price is based on Gemini’s auction price rather than an amalgamation of major exchanges. Gemini, a crypto exchange, was launched by the Winklevoss Twins of Facebook fame. Despite this pricing difference, the CBOE and CME futures serve the same purpose for investors.
A stumbling block for some retail investors in the futures arena is the high margin requirement from both the CBOE and CME. Margin cash higher than 40% is demanded from both exchanges due to the high volatility of the underlying asset. For example, each contract represents five contracts on the CME, meaning that if Bitcoin is trading at $10,000, margin of over $20,000 is required to trade one contract.
Many of the major online brokers, like TD Ameritrade, Interactive Brokers and E-Trade offer bitcoin futures.
2. Direct Margin Trading
This method is very similar to shorting a stock. Bitcoin can be shorted directly if your broker allows margin trading. Margin trading allows you to borrow bitcoin from your broker to immediately sell and hopefully buy back at the lower price, pocketing the difference.
Bitfinex is one of the cryptocurrency brokers providing margin trading.
Most interestingly, the platform Changelly.com, designed to instantly convert one cryptocurrency into another, plans to launch the website Oxygen.trade. Known as the first Repo platform for cryptocurrency, Oxygen is a blockchain-based decentralized marketplace for borrowing and lending crypto assets in a secure and legally compliant way. It will allow the shorting of any cryptocurrency. Also, the new platform will enable the individual investor to generate income from lending cryptocurrencies and raise liquidity against crypto-based collateral.
3. The Bitcoin Investment Trust
Investment firm Grayscale issued a product known as the bitcoin Investment Trust (OTC: GBTC) which trades over the counter on the OTC exchange. It is the only non-futures product available to U.S. investors that is designed to directly track the price of bitcoin. Several exchange-traded funds (ETFs) are available to European investors for this purpose. There are several ETFs pending regulatory approval in the United States at the time of writing.
GBTC has actual bitcoins backing it, with its assets stored in deep cold storage vaults on multi-signature addresses.
While GBTC is approved for IRA accounts, it is a highly risky instrument to short or buy — the reason being not only the volatility of Bitcoin but also the fact that GBTC can trade at a massive premium to the actual price of bitcoin. In fact, it is so wild that Merrill Lynch and other brokers are refusing to allow their customers to trade the product.
Use extreme caution should you decide to use GBTC as a tool to gain exposure to bitcoin.
4. Nadex Spreads
The North American Derivatives Exchange (Nadex) is a U.S.-based regulated exchange that offers binary options and spreads to nearly every investor.
Option spreads are a way to limit your risk while gaining exposure to both the short and long side of bitcoin. The contracts are settled in USD so there is no need to own a crypto wallet, and short selling is as comfortable as going long.
What I like best about Nadex bitcoin spreads is that risk and reward are pre-defined before the trade is entered. In other words, you know exactly how much you can lose, or gain, before joining the trade.
The pre-defined risk/reward of a spread makes it the most conservative way to short bitcoin.
5. Blockchain-Related Stocks
Shorting blockchain-related stocks is an ideal way to not only short bitcoin but also short the entire cryptocurrency craze. Many such stocks exist, such as Riot Blockchain (Nasdaq: RIOT), Long Blockchain (Nasdaq: LTEA), and Longfin (Nasdaq: LFIN). Choose the one that you think is most overhyped and short away!
Risks To Consider: It goes without saying that shorting bitcoin or any cryptocurrency is extremely risky. Only use the money you can afford to lose when trading any direction in bitcoin or the other cryptocurrencies.
Action To Take: If you think bitcoin is overvalued and will soon fall, consider using a portion of your risk capital to enter shorts via one or more of the five ways listed. The least risky way to short bitcoin is via the Nadex spreads since your risk and reward are predefined.