How to earn money when the Bitcoin price drops? Complete step-by-step guide
One of the most profitable trades I made this year was on the decline of Bitcoin. With Bitcoin, you can just as easily earn from a crash as from a rise in the price.
In this comprehensive guide, I’ll explain step-by-step how you can make a profit when the price of Bitcoin falls.
Why is the price of Bitcoin falling?
First of all, it is important to know why the price of Bitcoin is falling. The following factors play a role in this:
- News / emotion
- Technical analysis
- Manipulation by Whales
Bad news
If bad news comes out pertaining to Bitcoin or crypto in general, the price of Bitcoin will fall as people decide to sell. Consider, for example, a ban on trading or owning Bitcoin in a specific country.
Or when something has been hacked, such as the MtGox drama, where the price of Bitcoin fell by 23% within a very short time.
Technical analysis
I just happened to write a whole lot about technical analysis. In this way of forecasting, many traders look at the same signals. This ensures that many of the same decisions are made at certain times because everyone is looking at the same graphs.
This creates a kind of self-fulfilling prophecy, which will cause the price of Bitcoin to drop because everyone makes the same decision to sell at the same time.
Manipulation by whales
This one is a bit controversial as it implies that the market is being affected, but I certainly believe it is happening. Whales are people with a lot of Bitcoins and if you have a lot of something, then you can use that position to manipulate the market.
An example of this is that as a whale you suddenly sell many Bitcoins at the same time. This creates panic in the market. In this chain reaction, more and more people decide to sell, causing the price to dump further. The purpose of the whale is to get the price to drop to the point where it can buy back its Bitcoins cheaper.
How can you make money when the price of Bitcoin falls?
The easiest way to make a profit while Bitcoin is falling is through a CFD or a contract for difference. You do not really get hold of the Bitcoins, but you speculate on the rise or fall of the underlying value.
With a CFD you can go long (buy when the price goes up) and go short (sell when the price goes down). Buying makes sense, but how can you sell something you don’t have?
Explanation going short
When going short, you borrow the value from your broker and sell it directly. When you close the trade you have to pay back the borrowed value to your broker, but because the value has decreased you can buy back cheaply and you can pocket the difference.
This is all done automatically when you click on the sell button at your broker, but here is an example:
Suppose I borrow a bicycle from you that is worth $100 at that time. As soon as I borrow your bike, I will immediately sell it to someone else for $100. Subsequently, a new type of bicycle comes onto the market, making your bicycle only worth € 80. I decide to buy back your bike for the new value of $80. I give you the bike back and put $20 in my pocket as profit.
Again, this process is all automatic in the background when you click on sell on your broker. You can learn more about going short in my extensive going short guide.
What do you need to take advantage of a decline in Bitcoin?
In fact, you only need three things to make money when Bitcoin goes down:
- A trading signal (e.g. a bad news item)
- A broker where you can go short on Bitcoin
- Money to bet
On this page, you find my favorite brokers to short Bitcoin. You can create a free demo account with most of them, just to practice.