Shorting a cryptocurrency is like betting on the coin's price decreasing, similar to selling short a conventional financial asset. It is a speculative, high-risk trading method that necessitates a detailed comprehension of the cryptocurrency market.
How to Short Crypto: Profit During Crashes and Retracements
03 Feb, 2023
When you hold a long position in a cryptocurrency, your next step is usually aimed at closing it at exactly the right moment, regardless of the technical aspects. You may decide to sell it for fiat currency, convert it, or swap it. To do this, you typically go to a crypto exchange like Exolix. But if you have a bearish outlook on the price, you may wish to go further.
How to Short a Cryptocurrency
Most investors are familiar with the idea of selling short in the conventional financial markets, but an option to short-sell a cryptocurrency has not been available until recently. Short selling a cryptocurrency, like shorting equities, helps traders benefit from price declines. Shorting cryptocurrency typically involves borrowing coins from a broker and selling them. Once the value of the coin decreases, you buy it back and return it to the broker. The financial gain is the price differential.
Shorting cryptocurrency can be risky, yet it can also be incredibly profitable for investors who successfully forecast price fluctuations.
Advantages of Cryptocurrency Shorting
Cryptocurrency shorting has its pros and cons. On the positive side, selling short allows you to benefit from a price decrease. So, if you believe the market value of a cryptocurrency will decline, you may sell it short and profit when it does.
Shorting could also let you hedge against potential losses. When you're concerned about something like a market collapse, shorting against an outstanding long portfolio could help mitigate some losses.
Disadvantages of Cryptocurrency Shorting
Shorting is a risky tactic because there is no limit to how much you may end up losing if the market starts to climb. You might become trapped in scenarios such as a bear trap or a short squeeze, with the potential to lose a significant amount of money. Shorting also needs precise timing, discipline, and risk management. To generate profits, you must be correct not only about the general price movement but also about the timing of your transactions. This technique is not suitable for everyone.
Short selling usually involves a margin account with a broker or an exchange, which some traders may find difficult to get. It is critical to thoroughly consider these factors before deciding to adopt this kind of strategy.
You may short cryptocurrencies in a variety of ways, depending on the degree of risk you might want to accept and your skills.
How to Short Any Crypto: Popular Instruments and Methods
1. Trading on Margin
Crypto margin trading is among the simplest methods to short cryptocurrency. This sort of trading is permitted by many brokers and exchanges, as margin trades enable traders to borrow money from a broker to carry out their transactions. A margin implies leveraging or money borrowed, which can boost gains or aggravate losses. These days multiple cryptocurrency exchanges support margin trading, with Binance, OKX, and Kraken being notable examples.
2. Crypto Futures
Like many other assets, cryptocurrency does have a futures market. Under the future contract concept, a buyer agrees to a transaction in the asset under a contract that defines at what moment in the future and at what price the investment will be transferred.
When traders take long positions by purchasing futures contracts, they are wagering that the value of the asset will climb, allowing them to get a bargain on it later. If they sell futures contracts, it indicates a bearish view and a bet that the price of the asset will fall. One can sell cryptocurrency short by trading contracts that gamble on the cryptocurrency's value falling.
Most traders choose Bitcoin or Ethereum futures contracts because they offer the most liquidity for trading. This is currently accessible on a multitude of platforms. Bitcoin futures are traded on the Chicago Mercantile Exchange (CME), the world's largest trading platform for derivatives, as well as on various cryptocurrency exchanges. Bitcoin futures may be traded on large exchanges such as Kraken, Bybit, and BitMEX, as well as through popular brokerages.
3. Prediction Markets
One more option for selling cryptocurrency short is to use prediction markets, where you can speculate on the outcome of certain events. Prediction markets in cryptocurrency are comparable to those in conventional assets. Investors can customize a specific outcome and gamble on the result.
You may, for example, forecast that a cryptocurrency will fall by a specific number or percent, and if anybody accepts your bet, you'll benefit if it happens. Gnosis and Augur are two popular cryptocurrency prediction markets.
4. CFD (Contract for Difference)
A contract for difference (CFD) is a financial instrument that gives a payout depending on the price difference between the open and closing prices. Cryptocurrency CFDs, like cryptocurrency futures, are wagers on the cryptocurrency's price. You are short-selling a cryptocurrency when you buy a CFD expecting that values will fall. As contracts for difference are settled in fiat currency, investors are not required to hold or store cryptocurrencies.
CFDs typically use longer settlement periods than cryptocurrency futures. Furthermore, for certain CFD markets in cryptocurrency, traders may commit to a contract that is based on the value of a cryptocurrency or its performance relative to a fiat currency or another cryptocurrency.
5. Binary Options, How to Buy/Short Crypto
Traders may also short cryptocurrency using put and call options. If you want to sell the currency short, you will buy a put option. This means that you want to sell the currency at current prices, even if it drops later.
Some international exchanges provide access to binary options, but the risks and costs are substantial. One benefit of trading binary options over futures is that you can limit your downside by only buying put options. As a result, your losses are restricted to the cost of the put options. OKX and Deribit are two popular options trading platforms.
Shorting cryptocurrency may be a profitable trading strategy. When used effectively, experienced traders may profit from the volatile cryptocurrency market. Prices are growing tremendously and dropping as current regulations tighten and countless new coins emerge. However, because of the higher risk, newbies are advised to avoid high-leverage short-selling strategies.
Frequently Asked Questions
Shorting cryptocurrencies has two major risks. Market risk is the first: fluctuations in the prices of crypto assets should not be taken lightly. The second big challenge is regulatory uncertainty or the absence of it. Some of the largest cryptocurrency futures market platforms are unregulated. This implies that when anything bad happens with the transactions, traders have fewer alternatives for problem resolution and recourse.
This is a common question about where and how to short crypto in the United States. Bitfinex and Kraken are two of the most common venues for shorting cryptocurrency in the United States. You may borrow cryptocurrency from other players and then sell it in the market using these platforms. Once you're willing to buy your short position back, all you have to do is settle the debt along with whatever interest or fee it has accrued. It is performed automatically as you push buttons, so there's no need to return anything manually.