Gareth Johnson
Gareth Johnson
Updated on October 4, 2021

As you may know, Bitcoin and other altcoins are mostly traded on cryptocurrency exchanges. While some features of crypto exchanges mimic the stock market, especially when it comes to arbitrage and margin trading opportunities, they are mostly separate from the stock market and the regulations and protections it provides.

GBTC, or The Grayscale Bitcoin Investment Trust, is a vehicle for investing in digital currencies through the stock market. The Grayscale Bitcoin Trust is an SEC reporting company that buys Bitcoin in exchange for GBTC shares, creating Bitcoin investment opportunities.

Shorting, or short selling is an investment strategy that allows you to make a profit by selling a borrowed asset and buying it later on for a lower price. Short selling assets can be a risky but rewarding investment strategy, but shorting volatile assets like Bitcoin and GBTC is even riskier.

We prepared a guide to explain how short selling assets like Bitcoin and GBTC works.

What Does It Mean to Short Bitcoin?

Shorting works on the basis of borrowing. For example, if you want to short Bitcoin, you borrow a certain amount of bitcoins and sell them for the market price to someone else. You need to repurchase the same amount of bitcoins at the end of the borrowing period. If the price of Bitcoin has fallen by then, you can buy the same Bitcoin back at a lower price than you sold it for, pay back the borrowed amount, and make a profit off of the price difference. 

That said, Bitcoin’s price volatility makes shorting Bitcoin quite risky. If the price doesn’t fall as you hoped it would, your losses can skyrocket.

Finger holding up bitcoin to stand on wood table on top of cash

Let’s illustrate how short selling Bitcoin works with a concrete example. Imagine that the market price of Bitcoin is $1,000 and you borrow 1 Bitcoin for six months. You sell the borrowed Bitcoin for $1,000 at the current market price. If the price of Bitcoin drops to $900 by the end of that six-month period, you will pay a lower price to buy back 1 Bitcoin to give back to your borrower and you will have earned $100 in profits.

However, if the price of Bitcoin increases in the time period you borrowed the asset for, that means you have to pay more to purchase Bitcoin in order to close your debt. Since the price of Bitcoin is highly volatile, it might be hard to correctly estimate whether it will rise or fall. That is why shorting Bitcoin can be excessively risky, especially for larger amounts.

What Is GBTC?

The Grayscale Investment Trust is a digital asset management company that buys cryptocurrencies from investors in exchange for company shares. Shares are traded publicly on OTCQX as GBTC.

One advantage of GBTC is that it saves investors from the trouble of storing and safekeeping their crypto assets. Since digital currencies constitute a largely unregulated market prone to hacks and scams, trusting a publicly traded company to handle the security of digital assets can be attractive to investors.

The Grayscale Investment Trust offers Ethereum, Litecoin, and Bitcoin Cash trading products as well as Bitcoin. GBTC aspires to mimic the price of Bitcoin at relative stability. That means traders can make cryptocurrency investments through GBTC, and use their funds to spread out their investments across a larger market. 

However, GBTC prices can be confusing for the uninitiated. For the most part, GBTC shares are purchased at the market value of the asset. So, in order to buy 2 BTC worth of shares, you pay the USD equivalent of 2 BTC at the current market. While in theory, GBTC prices follow Bitcoin, the price of GBTC can rise or fall ahead of Bitcoin. If the price of GBTC is higher than the current market price of Bitcoin, that means shares are sold at a premium. However, if the GBTC is getting traded at a lower price than Bitcoin’s market price, then it is sold at a discount.

Qualified investors can buy GBTC shares from the company directly with a $50,000 minimum investment. There is also a 2.0% annual fee. After a six-month no-sell period, investors can sell their shares on secondary markets. GBTC shares can be traded through brokerage firms.

How to Short GBTC?

Shorting GBTC became a popular topic around 2016 due to the high premiums product offered. Let’s go over what high premium means and how it affects GBTC.

GBTC has a net asset value (NAV) that matches that of Bitcoin. That means the NAV of GBTC equals the price of Bitcoin on any given day. However, if the market price for GBTC shares is higher than Bitcoin’s daily value, then the asset is trading at a premium. That was the case for a long time for GBTC, as the asset prices were consistently higher than Bitcoin prices up until February 2021.

Hand holding mobile phone with cryptocurrency exchange on screen to buy and sell crypto

The high premiums GBTC offered in comparison to the price of Bitcoin almost lasted for 5 years from 2016 and onwards, creating an expectation that price correction would occur eventually, lowering GBTC prices. That expectation basically defines the strategy of short selling GBTC. 

However, as most investors quickly realized, short selling GBTC is actually quite hard, especially compared to other digital assets. 

First of all, GBTC shares are locked up for six months when they are first bought, so it’s not possible for investors to trade their shares immediately. Secondly, GBTC shares are traded on brokerage accounts and it might be hard to find a broker that facilitates GBTC borrowing. It’s easier to short sell Bitcoin compared to GBTC since you can trade Bitcoin at a number of exchanges such as Bitfinex, Kraken, or Bitmex.

How Profitable Is GBTC Shorting?

In order to understand whether short selling is a profitable action one might take a look at the short interest ratio of stocks. Short interest refers to the number of shares that have been sold short – that is, borrowed but not yet returned. 

GBTC prices and trade data can be accessed on OTCQX. You can see the number of shares sold short on the short interest tables. If you divide the number of shares sold short on a given day with the daily share trading volume, you get a days-to-cover ratio. That ratio refers to the number of days expected to close (or cover) their short positions.

If the number of short interests or the days-to-cover ratio of a stock increases, that could indicate a sentiment that prices will further fall. However, there is also a reverse risk. As the days-to-cover ratio increases, there is a chance that market prices will increase. As short sellers have to buy back the shares at some point, the urgency to buy at the lowest price point can trigger a price increase that continues throughout the buy-back period. This is known as a short squeeze and it can lead to higher asset prices.

How to Short Bitcoin?

There are several Bitcoin investment strategies for digital assets. Some popular ways to short sell Bitcoin include shorting through Bitcoin exchanges, trading on Bitcoin futures, and binary options trading. 

You can short sell Bitcoin on crypto exchanges. Certain exchanges, such as Kraken, allow you to borrow from the exchange in order to leverage your purchases, but the risk is quite high as prices could rise when you expect them to fall.

Gold bitcoin on top of computer hardware

You can also trade futures contracts to short sell Bitcoin. Futures trade involves betting at future Bitcoin prices. You can short Bitcoin futures by investing in a futures contract that predicts a lower Bitcoin price. The Chicago Mercantile Exchange (CME) is a derivatives trading platform that supports Bitcoin futures trading. The Chicago Board Options Exchange (CBOE) is also expected to list Bitcoin futures contracts on its tradable products list. Trading platforms like Kraken and eToro also offer Bitcoin futures contracts.

Some offshore exchanges also offer binary options trading that allows you to place calls and put options to strategically sell Bitcoin.

Short selling Bitcoin can be risky, especially if you are leveraging your position through borrowed assets. If you are new to cryptocurrency investments, you want to research before you buy futures contracts or attempt binary options trading.

A Few Words Before You Go…

Short selling an asset can be a rewarding short-term strategy for cryptocurrency investors but it is also a risky approach since the price of Bitcoin and altcoins can be volatile. Prices of derivative assets like GBTC follow Bitcoin pricing, but it’s hard to predict how and when they might fall. If you miss the ideal sell-off window, you might find yourself trapped in a short squeeze, trying to buy back GBTC shares at a higher price than you sold them for.