In the article: “Make money with margin and leverage on bitcoins. The secret,” I discussed the loans that you can get in the Kraken trading platform to increase the volume of your investment. There, I was convinced that bitcoins had to grow and that’s why I took the risk to get a loan and buy more bitcoins with that money, but what if I'm convinced that bitcoins have to fall? Here the story is different, because I don’t need dollars to buy more bitcoins, instead I need bitcoins to sell them in order to buy them back at a lower price, in this way I would make a profit with the difference… In Kraken and many other trading platforms this is possible and the mechanism is quite similar as requesting a loan of dollars. To understand this, I will discuss a real example where I requested a loan of bitcoins instead. I will focus on the mathematical details of this investment; therefore, if there are financial concepts that you don’t get, I recommend you to read first the previous article. On the other hand, if you want to know how to set a short position in Kraken, I recommend you to watch the following video where I focus on the steps taken in the platform:

On March 12^th, 2021, based on a technical analysis, I forecast that bitcoins had to fall. Because of this, I requested a loan of bitcoins. My account balance before the loan was as follows:

Table I: Balance before investing.

Asset	Amount	Value
LINK
EUR	55.24	€55.24
BTC	0.26522	€12,655.74

As shown in Table I, adding bitcoins and euros, I had a total of 0.26637769 BTC, where 55.24 EUR was equivalent to 0.00115769 BTC. This implies that the bitcoin price was 47,717.9 EUR when I requested the loan. 0.26637769 BTC was my initial margin and as you can see, link was not part of it. Why? Because in Kraken, link is not considered a collateral. Consequently, the maximum loan that I could get with my initial margin was 0.26637769 x 5 = 1.33188845 BTC. This is because in Kraken, the maximum leverage possible is 5 times the initial margin. If I would like to increase the volume of the loan, I could sell my links to get more euros, but in my case I opted for a low risk investment, so I sold 0.5 BTC at 47,717.9 EUR and then bought them back at the value of 46,966.1 EUR. The summary of this transaction appears below:

Unlike the examples given in the article: “Make money with margin and leverage in bitcoins. The secret,” in this case what I did first was to set a selling position because I was betting that the price was going to fall. In finance, this investment strategy is called a short position, which is opposite to the long position discussed in the previous article. As you may notice, I only borrowed 0.5 BTC with a 5x leverage, this means that my active margin was 0.5/5 = 0.1 BTC. If I initially calculated 0.26637769 BTC to be my initial margin, then I only used a fraction of this margin. The other fraction, i.e., 0.26637769 – 0.1 = 0.16637769 BTC, also called free margin, could be used to get another loan. In my case, I only opted for a single transaction of 0.5 BTC. From Tables II and III we can see that I made a gross profit of 23858.95 – 23483.05 = 375.9 EUR. Within the interval of this transaction, the price of bitcoins suffered a percentage drop of 1.5755%; however, because I used a 5x leverage, my gross profit was 1.5755% x 5 = 7.8775%, with respect to the active margin. To verify this, remember that in my case, the initial margin used, or active margin, was 0.1 BTC at the price of 47,717.9 EUR, then the gross profit equals to 7.8775% * (0.1 * 47,717.9) = 375.9 EUR.

From these results we obtain an interesting conclusion: To make a profit of ~350 EUR, it is enough for bitcoins to oscillate ~1.5%. This is possible thanks to a 5x leverage on 0.1 BTC. At the end of this transaction, my account balance was:

Table IV: Balance after investing.

Asset	Amount	Value
LINK
EUR	384.18	€384.18
BTC	0.26407	€12,402.34

As you can see, comparing Tables I and IV, the amount of euros I had increased from 55.24 to 384.18, while the amount of bitcoins I had fell from 0.26522 to 0.26407. I initially said that I made a profit of 375.9 EUR, but it seems that I got less, so what happened with the rest? To understand this, let’s check the transaction summary:

In Table V we can see that Kraken charged me 0.00105 BTC for opening a short position at 01:48 AM. This is equivalent to 0.21% of my initial investment, i.e., 0.21% * 0.5 = 0.00105 BTC. Considering that bitcoins were worth 47,717.9 EUR, then this rate, in euros, is equal to 0.21% * 23,858.95 EUR = 50.10 EUR. Kraken can choose to charge the fees either in bitcoins or in euros, but as you can see, in the end, this is exactly the same. The position was closed at 11:30 AM on the same day. During this period, 2 rollover fees were charged. In Kraken, this fee is charged every 4 hours and is equal to 0.01% of the initial investment. In my case it was 0.01% * 0.5 BTC = 0.00005 BTC. Last, when closing the position Kraken charged me 46.96 EUR, equivalent to 0.20% of the buying amount, i.e., 0.20% * 23,483.05 = 46.96 EUR. Consequently, answering the question, the rest went into paying the fees, and therefore the net profit actually was 375.90 - 50.10 - 46.96 - 4.09 = 274.75 EUR, and the total fee bordered 0.20 + 0.21 + 0.01 + 0.01 = 0.43% of the investment value. This means that in order to start making profits one must wait for bitcoins to exceed this variation because otherwise one will only end up paying the fees. Note that these fees are only referential because they depend on the amount of money invested. In the example given here, although I had bitcoins in my account, it is important to remark that in order to borrow them I don't need to have them in advance. For example, if in Table I instead of 0.26522 BTC I would have had 12,655.74 EUR, then the result would have been the same. Consequently, it is enough to have collateral coins to borrow bitcoins and then sell them to obtain profits when the market is going down.

Finally, it will be important to compare the short position described in this article with other types of investment. In particular, here I compare it with the null sale and the simple sale. The first one consists of doing absolutely nothing, that is, the amount of bitcoins doesn't change because I neither sell nor buy them. The second one consists in selling and buying bitcoins without leverage. The results appear below, where for simplicity I have focused only on the 0.26522 BTC I had in Table I.

In Table VI, I show the amount of bitcoins (and its equivalent in euros) that I had at the beginning and at the end, and the difference is the profit that I made. Notice, that I'm considering the same fluctuation as the previous case, that is, the initial bitcoin price was 47,717.90 EUR and the final price was 46,966.10 EUR. In the null sale, the amount of bitcoins didn't change; however, because they lost value against the euro, I ended up losing -199.39 EUR. In the simple sale, I made a profit of 0.0028998 BTC; however, in euros I lost -63.20 EUR. To understand this, let's see step by step how I got these results. The bitcoins that I had were first sold at the value shown in Table I, i.e., 12,655.74 EUR. Of course, we must bear in mind that there was a fee to pay. Let's say that this fee was 0.25% of the amount invested. Then, when I sold the bitcoins I paid in fees 12,655.74 x 0.25% = 31.64 EUR, which left me with a capital of 12,624.10 EUR. The latter value is the amount that I used to buy the bitcoins back, but to do so I had to pay again a fee, i.e., 12,624.10 x 0.25% = 31.56 EUR, that is, the exact amount that I used to buy back bitcoins was 12,592.54 EUR, which gave me 0.26811 BTC at the price of 46,966.10 EUR, and this corresponds to the data given in Table VI. As you can see, the result is quite special because if we focus on euros, I have lost -31.64 -31.56 = -63.20 EUR; however, if we focus on bitcoins, I started with 0.26522 BTC and ended up with 0.26811 BTC, that is, I gained 0.0028998 BTC, which translated into euros at the value of 46,966.10 EUR is equivalent to 136.19 EUR in profits. If we add to this result the fees I had to pay, we would obtain the figure of 136.19 + 63.20 = 199.39 EUR. This means that while a null sale generates a loss x, a simple sale generates a gross profit x expressed in bitcoins. The question is: What is the real result, -63.20 EUR or +136.19 EUR? This outcome is what makes an investment very interesting... in real time I'm losing -63.20 EUR, but since my goal is to accumulate more bitcoins (I'm buying them back for this reason), then, looking upon the future, I have achieved a profit that translates into 136.19 EUR.

The third case is a bit more complex, but as you can see in Table VI, it is much better than the simple sale. To understand it, let's see step by step how I got these results. Removing 55.24 EUR from the final balance given in Table IV and converting the remaining euros to their value in bitcoins, we obtain 0.27107 BTC. Hence the final profit in bitcoins is 0.00585 BTC, which expressed in euros gives 0.00585 x 46,966.10 = 274.75 EUR. This value was previously calculated when we found the net profit. In this sense we can conclude that a short position with a 5x leverage gives better gains, of course the risk will always be higher but with experience you will be able to manage it correctly.