How to short bitcoin: the four routes, and how each one goes wrong

There are four ways to bet that bitcoin falls, and they are not interchangeable. You can sell a regulated futures contract, trade a perpetual future on a crypto exchange, buy an inverse exchange-traded fund, or borrow bitcoin and sell it. Each has a different counterparty, a different cost of carry and a different way of going wrong. This explains the mechanics of each, and it is not advice to use any of them.

What does shorting bitcoin actually mean?

It means taking a position that gains when the price falls. You are not selling bitcoin you own; you are creating an obligation that becomes cheaper to close out if the price drops.

The arithmetic is the thing to understand before anything else. When you buy bitcoin your maximum loss is what you paid, because the price cannot go below zero. When you short it there is no ceiling on the price, so there is no theoretical limit on the loss. That asymmetry is the whole reason shorting is treated as a professional activity.

Route one: regulated futures

CME Group lists cash-settled bitcoin futures. The standard contract is 5 bitcoin, and the micro contract is 0.1 bitcoin, which is one fiftieth of the size. Both settle in cash against the CME CF Bitcoin Reference Rate, so no bitcoin changes hands at expiry.

Selling a contract is a short position. If the reference rate falls, the contract is worth less and you close at a profit; if it rises you pay the difference.

The tick on the standard contract is $5 per bitcoin, which is $25 per contract, because every price move is multiplied by five.

Two things make this route distinct. It is overseen by the Commodity Futures Trading Commission and cleared centrally, which removes the risk of an exchange disappearing with your money. And it needs a futures-enabled brokerage account with margin, which is a higher bar than opening an exchange app.

Route two: perpetual futures on a crypto exchange

Perpetual futures, or perps, are the most-used shorting instrument in crypto and the least well understood. They are futures with no expiry date.

Because nothing forces convergence at expiry, perps use a funding rate instead. At set intervals, usually every eight hours, longs pay shorts or shorts pay longs depending on whether the contract trades above or below spot. When the market is bullish the rate is typically positive, which means shorts receive funding; when sentiment flips, shorts pay.

That gives a short position a carry cost or a carry income that changes every few hours and is not knowable in advance. A trade that is right about direction can still lose money if funding runs against it for long enough.

Perps are also where leverage is cheapest to access and liquidation is most common. A position is closed automatically when margin runs out, and a sharp upward move liquidates crowded shorts in sequence, which pushes the price higher still. We have explained how liquidation cascades and short squeezes work in detail.

Route three: inverse exchange-traded funds

These are the only route that needs nothing more than an ordinary brokerage account.

The ProShares Short Bitcoin Strategy ETF, which began trading on NYSE Arca on 21 June 2022, was the first US inverse bitcoin ETF. It holds no bitcoin. It holds standardised cash-settled bitcoin futures in order to target minus one times the daily return of its benchmark.

The phrase doing the work there is "daily". The target is reset every day, and compounding over longer holding periods can produce a result that differs substantially from minus one times the move over that whole period, especially in a volatile market.

FINRA's position on this class of product is explicit, and it dates back to 2009. Its Regulatory Notice 09-31 concluded that inverse and leveraged exchange-traded funds that reset daily are typically unsuitable for retail investors who plan to hold them for longer than one trading session, particularly in volatile markets.

Fees also matter more here than in a plain fund, because the cost of rolling futures contracts is embedded in the return. The current expense figure should be read from the fund's own prospectus rather than from a data site. Our piece on how leveraged bitcoin ETFs work covers the same decay problem from the long side.

Route four: borrow and sell

The oldest method, and the most literal. You borrow bitcoin from a platform, sell it at the current price, and later buy it back to repay the loan. If the price fell you keep the difference; if it rose you make up the shortfall.

You pay interest for as long as the loan is open, and the platform can demand more collateral or close the position if the price moves against you. The counterparty risk is direct: your collateral sits with the lender.

What about put options?

Buying a put gives you the right to sell at a set price and is the one route where the maximum loss is capped, at the premium you paid.

The trade-off is time. An option expires, so you have to be right about direction and roughly right about timing. Options also need the account permissions, and their pricing depends on implied volatility, which in bitcoin is high, so the premium is expensive relative to equity options.

Why would anyone short bitcoin rather than just sell?

Two reasons that have nothing to do with predicting a crash.

The first is hedging. A miner with revenue in bitcoin and costs in dollars can sell futures against expected production to lock in a price, which is the same thing a wheat farmer does. A company holding bitcoin on its balance sheet can hedge part of the position without selling the coins and triggering a taxable disposal.

The second is relative value. A trader who thinks bitcoin will fall less than another asset can be short both and make money on the difference, even if bitcoin rises. Most institutional shorting is this kind of position rather than a bet on collapse, which is why open short interest is a poor read on sentiment.

How do shorts actually lose money when they are right?

Three ways, and all three are specific to this instrument rather than to the market view.

Funding can eat the position. A short held through weeks of positive sentiment pays funding every eight hours, and that can exceed the eventual gain from a fall.

Liquidation can close it early. A position that is correct over a month can be liquidated by a two-hour spike, and once closed it does not benefit from the fall that follows.

Daily reset can erode it. An inverse product held through a choppy sideways market loses value even when the price ends where it started, because each day's reset compounds from a different base.

Which route is legal where I am?

This varies more than anything else here and it changes.

Regulated futures and US-listed inverse funds are available to US retail investors through a brokerage. High-leverage perpetual futures on offshore exchanges generally are not, and several jurisdictions restrict or ban crypto derivatives for retail customers outright. In the United Kingdom, the sale of crypto derivatives to retail consumers has been prohibited since January 2021.

Check your own regulator before assuming a product is available to you. Using an offshore venue that is closed to your jurisdiction means no recourse if anything goes wrong.

The honest summary

Shorting bitcoin is not a view, it is a set of instruments, and the instrument usually decides the outcome more than the view does.

A regulated future is the cleanest expression and the highest barrier. A perp is the easiest to open and the hardest to hold. An inverse fund is the simplest to buy and is built for a single day. Borrowing and selling is the most straightforward to understand and puts your collateral in someone else's hands.

The common factor is that a short position has unlimited theoretical downside, and every route adds a cost that runs while you wait.

This article explains mechanics. It is not investment advice, and nothing here is a recommendation to buy, sell or short any asset.