Cryptocurrencies like Bitcoin (BTC), Ethereum (ETH), and Litecoin (LTC), are relatively new types of currencies that most businesses don’t understand yet. Basically, they have a small-scale usage as a payment method and are still more widely used as investment opportunities.

Short selling or shorting is a type of investment strategy that crypto traders can use when they expect the price of Bitcoin or other altcoins to decrease. The main reason why crypto traders are short selling is to gain a profit in the long run, as you’ll see below. We’ll also look into the most popular shorting methods and tell you a little bit more about Bitcoin vs Grayscale Bitcoin Investment Trust (GBTC) shorting.

What Does Bitcoin Shorting Mean?

Shorting Bitcoin is a process of selling the digital currency hoping that when its price decreases, users can buy it back for a significantly lower price. This allows crypto traders to gain some profit from the difference in the crypto market price. Simply put, short-selling or shorting is an investment method for gaining profit over a cryptocurrency’s price drop; buying low and selling high.

Bitcoin on gold surface

The short-selling process goes like this:

  • Short-sellers borrow an amount of Bitcoin with a commitment to pay them back later;
  • Afterwards, they sell BTC at the current market price, knowing that the value will drop down in the nearest future;
  • Then when the price of Bitcoin finally goes down, crypto traders buy Bitcoin back and pay them back to the loaner, thus gaining profit from the difference between Bitcoin’s selling value and the value at which they purchased them back.

However, this difference in price doesn’t always result in profit, as sometimes crypto traders may predict the wrong price movement and end up with huge losses.

Methods to Short Bitcoin

There are numerous different methods for Bitcoin shorting, so here are some of the most popular ones.

Bitcoin Futures Contracts

In a Bitcoin futures trade, a trader agrees to buy a contract in which the selling date and price at which the underlying asset will be sold are predetermined. When crypto traders buy Bitcoin futures contracts, they can either bet on Bitcoin’s price increase or decrease. So, afterward, when the value decreases, the traders will be able to buy the assets back at the predetermined higher price. Traders can buy Bitcoin futures on the most popular derivatives trading platforms such as Chicago Mercantile Exchange (CME), CME Micro Bitcoin Futures, and Chicago Board Options Exchange (CBOE), on some of the most popular crypto exchanges like Kraken, or at the brokerages like eToro and Bitfinex.

Margin Trading

Margin trading is the easiest method for Bitcoin shorting. Almost all of the most popular Bitcoin exchanges, such as BitMEX and Kraken, offer short-sells of cryptocurrencies through the margin trading method. Margin trading allows traders to lend BTC from their broker and sell them right away with the goal to purchase them back at a lower price, profiting from the difference.

Bitcoin wave with big white question mark on white background

Binary Options Trading

Binary options is a form of trading where the trader predicts whether Bitcoin’s price will increase or decrease during a particular period of time. If the traders are right, they’ll earn the option’s payoff, on the other hand, if the traders are wrong, they’ll lose their investment. Every BTC binary option has an exact expiration date. The disadvantage of this trading option is the high fee for placing binary options during the high volatility of Bitcoin.

What Is Grayscale Bitcoin Trust?

The Grayscale Bitcoin Investment Trust (GBTC) is the newest answer to a longstanding question with cryptocurrencies: Can Bitcoin traders invest in BTC using the stock market? GBTC is a financial instrument that offers investors the opportunity to invest in trusts that hold huge amounts of BTC, meaning that as the value of Bitcoin increases/decreases, the shares in this trust keep track of the price of the digital currency, but only approximately.

Trusts like Grayscale Bitcoin Trust offer investors a method for indirect Bitcoin trading using the stock market. The trading of GBTC is done publicly on OTCQX, an over-the-counter market, using the Alternative Reporting Standards for companies that don’t need to be registered with the Security and Exchange Commission (SEC).

How Does GBTC Work?

The basic point of GBTC is to make cryptocurrency investment more accessible to the masses because, in practice, it isn’t possible to just purchase into the trusts at market prices. Let’s see how it really works.

Firstly, GBTC invites numerous different rich investors that are willing to give cash to the trust, and then GBTC buys Bitcoin with this money. Next, Grayscale puts this trust on the public stock market and allows traders to sell or purchase shares.

Vector illustration of bitcoins with red upward arrow on blue background

As the value of BTC rises/drops, the price of the trust follows this value, meaning that the trust itself, along with the shares in it, tracks Bitcoin’s price. With this process, the authorized investors, the ones that funded the trust, receive direct payback from the resell of their shares.

Advantages of GBTC

When you use the Grayscale Bitcoin Investment Trust, issues like storing, safeguarding, and purchasing Bitcoin become a thing of the past. In the form of security, the investors can purchase Bitcoin, as if they were buying stocks from the stock market.

Another advantage of GBTC is that investors don’t have to burden themselves with filling the tax return. GBTC is an investment that is supervised by the SEC and at the same time, there is sufficient exposure to the Bitcoin’s price, which allows risk-aware investors to use the volatility of the price of BTC.

Disadvantages of GBTC

Because the Grayscale Bitcoin Investment Trust is the only BTC stock on the financial market, there is a possible risk that the price of GBTC will drop down as soon as a new alternative appears. Another downside of GBTC is the working time. While Bitcoin exchanges allow you to purchase Bitcoin 24/7, stock exchanges only work Monday till Friday, and they are closed throughout the weekend.

As an investor, it’s very important to understand that these aren’t traditional stocks you’re dealing with if you consider acquiring shares from Grayscale Bitcoin Trust. The traditional shares, like the shares from a corporation or a company, are presumed to be securities. The shares of GBTC are a piece of a limitless guarantee trust.

How Can You Buy GBTC?

As we previously mentioned, Grayscale Bitcoin Trust is traded on an over-the-counter exchange. Individuals can purchase shares from GBTC just like they purchase traditional shares and stocks by using an advisor or a broker, or through a cryptocurrency exchange platform. For the investors, this means a huge range of options. With tools such as GBTC, you can trade Bitcoin versus shares and stocks in different corporations and companies, but in a very restricted, and quite pricey way.

Stack of bitcoins on top of USD bank notes with blue light

How to Short Sell GBTC?

The short-selling of GBTC increased in popularity around 2016 because of the offering of products with high premiums. Now, let’s see what the high premium is, as well as its impact on GBTC.

GBTC features a Net Asset Value (NAV) that matches the value of Bitcoin, meaning that GBTC’s NAV is equivalent to Bitcoin’s price at any time. However, when the current Bitcoin market value is lower than the daily price of the GBTC shares, the funds are traded at a premium. For instance, Bitcoin’s price was constantly lower in comparison to the price of GBTC shares up till February 2021.

As it appears, GBTC shorting is really difficult in comparison to shorting other cryptocurrencies. This is due to the fact that the shares of GBTC are blocked for six months after they were first bought. The second thing is that the trading of GBTC shares is done on a brokerage account and it’s quite difficult to find a broker who facilitates GBTC loaning.  

Is GBTC Shorting Profitable?

Before we conclude whether GBTC shorting is profitable or not, we have to learn what a short interest balance of stock is. Short interest is the number of shares that have been sold short or loaned but haven’t been reverted yet.

Man surprised face covering mouth with fan of dollar bills

Every investor can see the trading data and the prices of GBTC on OTCQX. They can take a look at the number of shares that were sold short on the short interest table. By dividing the share’s trading volume from a particular day with the number of shares that were sold short on that day, the investors can obtain the days-to-cover balance. This is a balance of the number of days expected for covering/closing their short positions.

The rise of the number of short interests of stock can point out that the price of GBTC can decrease further. But it doesn’t mean that it’s going to decrease with certainty. Due to the increased number of short interests, there is a chance that the market value of the stock will rise. Because at some point, the investors have to purchase the shares back, the necessity of purchasing at the lowest possible value can result in a value rise that can extend throughout the purchase back period. This process is called short squeeze and it may result in a higher value of the assets.

A Few Words Before You Go…

You’re now prepared for GBTC shorting. Although it may seem to you that by reading this article you’ll know everything about short selling of GBTC, you have to understand that shorting is a risky business due to the fact that you have to predict the crypto market movements. However, with a huge understanding of the market and a knowledge of the factors that have an impact on the price of cryptocurrencies you’ll be able to reduce the risk and, therefore, eliminate the probability of losses.