Can I long USD/BTC instead of shorting BTC/USD?

Let's say that I think that bitcoin has hit a peak. I want to short bitcoin, but in a far less risky way. In order to do this, I want to go long on USD/BTC. Let's say (as an example) that I longed this pair when Bitcoin was $13,250 (on the dropping side, I set that as strike price), and sold it when it was $8,000 and going up. I would have made a 65% return as opposed to a USD/BTC short of just under 40%. I want to do this to be able to make a higher profit during a bear market. I feel that this is a good idea.

The question is, to clarify: can I long the USD/BTC pair? This pair is equal to one divided by the USD price for one bitcoin. I think it is good because it offers an alternative to shorting, one with a theoretically unlimited upside and a limited downside. If one bought $250 worth of bitcoin at $100 and sold the position at $6,000 in the beginning of November of 2017 or 2018, it would have brought $4.50 as opposed to a theoretical owed amount of over $14,000.

As a commenting individual in the comments said, this move could have theoretically brought (and maybe has brought) very high returns. Even going back 1-2 years ago (roughly speaking, as of writing), such a move timed at the right time could have brought 500% or more returns depending on how good timing the trader had.

exchanges

Sunflower

Posted 2019-11-23T23:44:59.303

Reputation: 31

Hypothetically, if you did this in 2011-2012, you could have turned $100 into $1000 or more using realistic timing. – Number File – 2019-11-24T00:26:51.483

It is unclear to me what your question is. – Pieter Wuille – 2019-11-24T02:05:13.743

I'm in favor of keeping this question open as I believe it is a question related to fundamentals of trading practices and can be useful for number of people who have questions related to that. This question will not get outdated until trading practices changes (so for a number of years). – Ugam Kamat – 2019-11-24T09:39:48.173

Answers

Going long USD/BTC is identical to selling the amount of BTC that you have for USD. To put it into perspective, assume you had 1 BTC when the price of BTC was $13,250. When you went long USD/BTC, what you essentially did was you sold 1 BTC and received $13,250 in your account. When the price of BTC dropped to $8,000, you still had $13,250 in your bank account. The value that you own in terms of USD remains the same. The only difference is that it now represents 1.656 BTC. So if the currency is BTC you made a profit of 65.6%. If currency is USD, you made a 0% return.

Short-selling is a different beast. In short-selling, you borrow some BTC from a third party, sell them in the market and then buy BTC at a later price. So in the above example, you borrowed 1 BTC from say John at $13,250, sold them in the market and later bought 1 BTC at $8,000 and gave 1 BTC back to John. So you have netted $5,250 in profit. Your starting capital was very small (which includes interest payments to John for lending you 1 BTC and some margin requirements that needs to be kept for safety.) So with a very little capital investment you have netted $5,250 in profit. This can be also used to buy Bitcoins at the current market price. So with short-selling you can gain profit in terms of USD and BTC.

However, I like to note that short-selling is a high-risk, high reward game. If the price of BTC had moved higher as compared to USD, you would have lost your margin capital, and still made interest payments to John. So in essence, you can lose 100% of your initial investment in the short selling game if the price moves in the opposite direction in which you have bet.

Ugam Kamat

Posted 2019-11-23T23:44:59.303

Reputation: 5 180