How to short crypto?

Those who have even the slightest idea of how crypto investing works know that investors make a profit when the price of the assets in their portfolio rises above what they paid for them. They sell crypto at a new, favorable price and earn on the difference. Conversely, investors suffer losses if the value of a crypto asset falls below the price at which they were acquired. It’s logical to the extent that it even becomes boring! But the privilege of the volatile crypto market is that you can make money on it not only when it grows, but also when it crashes. 

Do you want to make your capital grow up when the crypto goes down? To do this, you need to learn how to short cryptocurrency and what are the advantages and dangers of doing so.

How does shorting work?

The most common crypto investment method, as we mentioned at the beginning of the article, involves the strategy of buying an asset at a low price in order to subsequently sell it at a higher price and earn on the difference. For instance, in November, you bought 1 bitcoin when it was worth $15,000. In April, the BTC price went up to $30,000 and you sold it for $15,000. This tactic is known as holding a long position. In this case, investors do not mind waiting as long as necessary, in the hope that the asset in their portfolio will appreciate. 

In contrast, short selling investors bet on the decline in crypto value, in order to profit from price drops. Moreover, they do not even own the crypto they intend to make profit of. That is why this method is called a shorting, or short-selling, implying that such investors are “short” of the crypto. They predict a drop in the price of a certain crypto asset, borrow it and immediately sell it. When the price of a crypto falls, you buy it back to repay your debt and capitalize on the difference.

A short selling example looks like this:

In December, you take out a loan of 1 Bitcoin at an interest rate of 5% per year without having to pay a collateral. One BTC is worth $50,000 at the time the loan is issued.

Then you immediately sell your bitcoin on a crypto exchange and get $50,000 for it.

One year after you borrow Bitcoin, the BTC price drops to $15,000.

You buy Bitcoin for $15,000 and repay the loan.

You made a profit of $35,000 minus the transaction fee plus the 5%.

If, after a year, the price of Bitcoin has not dropped to $15,000, but you still believe it will collapse, you can pay the lender $750 in annual interest. (Some services offer this option as a last step).

If, after a short wait, Bitcoin does crash, as you expected, while the rest entreated you as an insane one, looking at how you bet short, you buy Bitcoin at $15,000 and repay the loan.

Your profit is $34,250.

Сryptocurrency shorting methods

When it comes to shorting cryptocurrencies, there are quite a few efficient methods and strategies available to traders seeking to profit from price declines. Understanding these different approaches can provide you with the flexibility and knowledge needed to navigate the volatile crypto market. In this section, we will explore the different crypto shorting methods, including margin trading, futures contracts, and options trading, offering insights into their unique characteristics and potential benefits. By familiarizing yourself with these methods, you can make informed decisions and capitalize on market movements in your shorting endeavors.

Margin Trading

Margin trading is quite a common way to short sell crypto. It allows you to borrow funds from a broker to trade a larger position than you would be able to with your own funds. When short selling with margin trading, you’ll need to deposit collateral to secure the borrowed asset.

Margin trading can be a valuable tool for short selling, but it’s important to realize the risks. If the price of the asset rises instead of falling, you may be forced to buy it back at a higher price than you sold it for, resulting in a loss. Addedly, margin trading comes with its own risks, comprising the potential for margin calls and forced liquidation.

Spot Trading

Spot trading in the realm of cryptocurrencies is akin to a fast-paced marketplace where traders can swiftly buy and sell digital assets at the prevailing market prices. This method is as direct as a lightning bolt, allowing traders to seize immediate opportunities without any lengthy contractual obligations.

Spot trading involves the art of borrowing cryptocurrencies from individuals or platforms, promptly selling them at the current market price, and aiming to repurchase them at a later time when prices dip. It’s like a dance of risk and reward, where traders exploit downward movements in crypto values to their benefit. 

Spot trading provides the agility needed to capitalize on fleeting market fluctuations, enabling traders to harness the powers of timing and intuition. However, like any swift endeavor, it demands a keen knowledge of market dynamics and a sharp eye for spotting potential profits amidst the chaos.

Futures Trading

Trading in futures is another well-known approach for going short on crypto. You have the opportunity to acquire or dispose of an asset at a pre-established price in the future through the use of futures contracts. When you sell short with the futures market, you sell the futures at the present market price and then get them back at the decreased price.

Futures trading can be a valuable tool for short selling, but it’s crucial to be aware of all possible risks. If the price of the asset rises instead of falling, you may be forced to buy back the futures contract at a higher price than you sold it for, resulting in a loss. Plus, futures trading comes with its own risks, involving the potential for margin calls and forced liquidation.

Perpetual Swaps

Perpetual swaps, a customary trading instrument in the crypto world, offer a unique and innovative way for traders to engage in leveraged trading without an expiration date. Unlike traditional futures contracts that have a set expiry, perpetual swaps provide a perpetual trading experience, hence their name.

Traders can leverage these financial instruments to engage in speculation on the price fluctuations of different cryptocurrencies like Bitcoin or Ethereum, allowing them to take either bullish or bearish positions. The trading mechanism involves a funding rate mechanism that helps maintain a balance between buyers and sellers. This funding rate is exchanged between the two parties every few hours, ensuring the perpetual swap’s price closely tracks the underlying asset’s spot price.

Perpetual swaps offer traders the flexibility to trade with leverage, enabling them to amplify potential gains or losses. Nevertheless, it’s essential to note that the use of leverage carries additional risks, as losses can exceed the initial investment.

Overall, perpetual swaps provide a dynamic and accessible trading option for cryptocurrency enthusiasts, allowing them to exploit market volatility and potentially generate profits in both rising and falling markets.

Options Trading

Options give traders the right, but not the obligation, to sell a crypto at a specific price within a certain time frame. By purchasing put options, traders can benefit from price declines. If the price drops below the predetermined price, they can sell the option or exercise it to sell the crypto.

Pros of shorting crypto

Shorting cryptocurrencies can offer unique opportunities for traders looking to profit from market downturns or bearish trends. By grasping the potential advantages of shorting crypto, you can capitalize on price declines and potentially generate significant returns. In this section, we will delve into the pros of shorting cryptocurrencies, highlighting the benefits and strategies that can help you navigate this alternative trading approach effectively.

• Expands opportunities: Unlike traditional trading, where traders only make money when the price of an asset rises, shorting crypto allows traders to make money both when the price of an asset rises and falls.
• Provides the fastest way to make a profit: The market goes up the stairs and down the elevator. It is possible to take profits in a falling market much faster, because fear is stronger than hope.
• Diversifies your portfolio: a balanced portfolio containing assets that have little or no correlation with each other will reduce risks and increase the overall return on investment.
• Hedge against potential losses: By holding two positions at the same time, traders can offset losses from one position with gains from the other. For instance, by a short position, they can protect against losses on a long one.
• Does not require large initial capital: If you do not have a lot of funds, then when trading short, you can borrow crypto from a broker. Thus, the potential profit may be higher than if you were trading with your own funds only.

Cons of shorting crypto

While shorting cryptocurrencies can be a lucrative strategy for some investors, it is important to consider the potential drawbacks. Understanding the cons of shorting crypto can help you make informed decisions and manage your risk effectively. Let us explore some of the downsides associated with shorting cryptocurrencies, shedding light on the challenges and considerations that traders need to be aware of.

• The possibility of unlimited losses: Unlike traditional investing, where the maximum loss is limited to the amount you invested, short selling is a risk that can exceed your original investment. If the price of the asset you sold short continues to rise, you may be forced to buy it back at a much higher price than you sold it for, resulting in a significant loss.
• Great knowledge, experience and skills are required: Traders who do not understand the market well can lose a lot of money.
• Requires constant market monitoring and quick response: The market is highly volatile, and prices can fluctuate rapidly. Traders who short crypto must be prepared to monitor the market closely and be ready to close their positions quickly if the price starts to rise.
• Margin Interest: Borrowing from a broker is not free, just like with any other loan. The broker will take interest from you while a short position is open.
• Access to margin trading is required: Obtaining a margin account with an exchange, which is necessary for shorting, can pose challenges for certain investors.

Conclusion

Shorting crypto is a lucrative trading strategy, if it’s done properly. It requires a lot of knowledge and skill, but the potential rewards can be great. By following the tips and strategies outlined in this article, you can increase your chances of making money in the volatile crypto market. Make a point of always doing your research and choose a reputable and secure broker or exchange before shorting any cryptocurrency.

FAQ

What does it mean to short crypto?

Shorting crypto is a well-known trading strategy used by investors to make money when the price of a crypto falls. The concept is simple: you borrow a certain amount of crypto from a broker, sell it on the market, wait for the price to drop, and then buy it back at a lower price. Your profit is determined by the gap between the selling price and the buying price.

Where to short crypto?

Numerous exchanges and brokerage firms provide the option to engage in short-selling of cryptocurrencies. Some of the most prevalent ones include BitMEX, Kraken, and Binance. Before choosing an exchange or broker, make sure to do your study and choose one that is reputable and secure.

How to long and short crypto?

To long crypto, you can open a buy position on a crypto exchange or broker. This means buying the digital currency with a reasonable assumption that its value will increase over time, enabling you to sell it for a profit. You can also use leverage, which allows you to trade with borrowed funds and potentially increase your profits.

Short selling crypto implies borrowing a certain amount of digital currency from a broker and selling it on the market with the hope of purchasing it back at a decreased price. To go on short selling crypto, you need to have a margin account with a broker that offers shorting services. You also need to have a great familiarity with the whole digital market and the specific crypto you are shorting.

How to make money shorting crypto?

Making money from shorting crypto involves selling a crypto at a higher price, waiting for it to decrease in value, and then acquiring it back at a lower price, enabling you to profit from the price drop.

Disclaimer: Please keep in mind that the content of this article is not financial or investing advice. The information provided is the author’s opinion only and should not be considered as direct recommendations for trading or investment. Any article reader or website visitor should consider multiple viewpoints and become familiar with all local regulations before cryptocurrency investment. We do not make any warranties about reliability and accuracy of this information.