Want to know how to make money when Bitcoin goes down? Let me show you! One of the most profitable trades I ever made was shorting Bitcoin. And it’s just as simple to profit from a dump as it is to make money from a pump.
In this comprehensive guide I will explain step by step how to make money when Bitcoin goes down.
Why does the price of Bitcoin fall?
First of all, it is important to know why the price of Bitcoin goes down. The following factors play a role in this:
- News / emotion
- Technical analysis
- Manipulation by Whales
If bad news comes out that has to do with to Bitcoin or crypto in general, the price of Bitcoin will fall because people will sell. For example a ban on trading or owning Bitcoin in a certain country.
Or when something has been hacked, like the MtGox drama which caused the price of Bitcoin to go down by 23% in a very short time.
I happened to write a post about technical analysis yesterday. With this method of predicting price movements, many traders look at the same charts and signals. So many times the same decisions are being made at the same time, because everyone is watching the same stuff.
This creates a kind of self-fulfilling prophecy, which means that the price of Bitcoin will go down because everyone makes the same decision to sell at the same time.
Manipulation by whales
This is a bit controversial because it implies that the market is rigged, but I believe that it this is happening. Whales are people with a lot of Bitcoins and if you have a lot of something, you can use that position to manipulate the market.
Example: If you’re whale and you suddenly sell many Bitcoins at the same time, you create panic on the market. In this chain reaction, more and more people decide to sell, causing price to drop further. The purpose of the whale is to have the price dumped so far that he can eventually buy back its Bitcoins cheaper. Or take a short position during the dump and make even more money while Bitcoin goes down.
How to make money when Bitcoin goes down
The easiest way to make a profit during a Bitcoin dump is through a CFD, or a Contract For Difference. You do not actually get the Bitcoins, but you speculate on the rise or fall of the underlying asset.
With a CFD you can go long (buy if price rises) and go short (sell if price falls). Buying makes sense, but how can you sell something that you don’t have?
Explanation going short
When going short you borrow the assets from your broker and you sell it immediately. If you close the trade you have to pay back the borrowed assets to your broker, but because the value has dropped you can buy back cheaper and you can pocket the difference as profit.
This happens all automatically when you click on the sell button on your trading platform, but here’s an example:
Suppose I borrow a bike from you that is worth $100 at that time. As soon as I have borrowed your bike I will immediately sell it for someone else for $100. Then a new type of bike comes on the market, making your old bike worth only $80. I decide to buy your bike back for the new value of €$80. I give you the bike back and put $20 in my pocket as a profit.
Again, this process happens automatically in the background with your broker when you click sell.
What do you need to profit from a Bitcoin price dump?
You only need three things to make money when Bitcoin goes down:
- A trading signal (for example, a bad news event or technical analysis setup)
- A broker where you can go short on Bitcoin
- Money in your account to oen the trade
My favorite broker to short Bitcoin is BDSwiss. So I use their platform for this guide. If you want to follow a long, just create a free demo account in 49 seconds:
Step 1: Log in to the trading platform
Log in to your account and enter the Bitcoin search field . Click on the top search result.
Step 2: Open Short position on Bitcoin
Click on Sell to go short in order to make money when Bitcoin goes down. You can also click the little star to add Bitcoin to your favorites list.
In the window on the right you can now set your position.
- Make sure this is set to Sell
- Current price of Bitcoin including the spread (difference between bid and ask price)
- Set the Amount you want to sell in this example 1 Bitcoin
- Value of you position. So in this example it’s the exact price of 1 Bitcoin
- We are using x5 leverage on this trade so we only need $1,456.38 to trade 1 whole Bitcoin. Notice how the broker also calculates this for you in your account currency
- Enter your take profit target. Position will close automatically in profit when price reaches this level
- Enter your stop loss. Position will close automatically and cut your losses when price reaches this level
- Finally click Place trade to open your position
Congratulations! You have just opened a short trade and you will now make a profit when Bitcoin goes down! 🙂
Step 3. Close or adjust position
Your trade is now active and we hope that Bitcoin will drop. If you have entered a take profit and stop loss level, you do not have to do anything anymore.
If Bitcoin goes down, your trade is automatically closed on the price level you have chosen. If Bitcoin goes up, your trade will be closed automatically when the price level you have entered as a stop loss has been reached.
If you have not entered a profit or stop loss or you want to adjust the amounts, you can. To do this, click on the second icon in the left sidebar. In the screen that opens, you can edit the position or close it manually.
After you finish editing, just click the Save button.
Don’t just make a profit when Bitcoin goes down…
Now you know how it works and the great thing is that you cannot only make a profit when Bitcoin goes down… It works on other assets too. Last year I made a very nice short trade on Facebook when the privacy scandal came to light. The stock price of Facebook collapsed and I managed to hit the sell button just in time.
That concludes this tutorial. If you have any questions, feel free to ask them in the comments. Now go practice on a demo account.
Let me know what your results are in the comments below!