How To Short Cryptocurrency: A Detailed Guide

Almost a decade after the launch of Bitcoin Bitcoin, cryptocurrency has become a star in the financial world, with steady growth in value and market cap. Earlier this year, the most prominent crypto coin, Bitcoin, reached a market cap of $1 Trillion, which is nearly 10% of the market cap of all the gold ever mined. The total market cap of all crypto coins is almost $2 Trillion, which shows how mammoth this whole avenue is.

As the penetration of crypto increases, new investors are joining in by the second to try out their hand at crypto trading. The market is constantly evolving, and new opportunities to generate returns are being created rapidly, mainly by taking positions on these coins’ price. One such approach is to short cryptocurrency, which many crypto traders are adoring.

This article will jump onto the sought-after approach of shorting cryptocurrency, its benefits, how to short cryptocurrency, and much more in detail!

What Is Shorting Cryptocurrency?

If you are still looking for an answer on ‘what does it mean to short bitcoin or cryptocurrencies’, here it is. Shorting (also known as short selling) is a trading strategy where a trader sells an asset in the hope to buy it later at a lower price, pocketing the difference as profit. In simpler terms, if a trader enters a short position, they bet on the asset’s price to fall. The short-selling strategy is prevalent as it is an excellent method to profit even when the market is plummeting. Shorting is a common strategy in any financial market, including cryptocurrencies, and is done by both short and long term traders. However, make sure you know the trading mistakes to avoid before you start crypto trading.

Shorting is usually done with borrowed funds or assets, but not in all cases. Let us take an example.

Suppose you borrow 1 Bitcoin while its trade value is $55,000 and have to return it in a week with $100 interest. Now, you believe that Bitcoin prices will fall. Therefore, you sell the borrowed Bitcoin, and as predicted, the price reaches $50,000. You buy the Bitcoin at $50,000 and return it to the original lender with the decided interest. In the end, you executed cryptocurrency shorting (Bitcoin shorting) and pocketed a net profit of nearly $5000 (minus the interest payment and the platform fees) in a week with borrowed funds.

Benefits of Shorting Crypto

The critical factor while shorting cryptocurrency is borrowing an asset and trading on its price (usually done this way). Therefore, you are risking someone else’s assets in a bid to gain some profits. Here are some key benefits of shorting crypto:

  • No Upfront Investment: Since you are borrowing an asset, you don’t need to pay anything upfront (usually depends on the type of contract you are in), and you can generate profits with borrowed funds
  • Using The Funds: Once you sell the crypto, you have a pool of funds that can be used until you have to buy crypto coins to end the short position. These additional funds are usable to maximise the long positions in the meantime and increase profits.
  • Increasing Market Liquidity: When you sell crypto while shorting it, you add it to the market pool, increasing supply. Therefore, if too many people open short positions, the coin’s market liquidity rises, increasing supply while the demand remains the same. In the end, the prices decrease, and your short position generates profits.
  • Diversifying Risk: When you short cryptocurrencies, you are diversifying your risk if the price of the coin decreases. In case it increases, your long positions should cover it. Therefore, you have covered your risk wherever the market goes.

Longing VS Shorting Cryptocurrency

In any financial trading, the most common trading strategy used by almost all traders is longing. A long strategy is when a trader opens positions to buy a cryptocurrency, expecting the prices to rise where they can sell it for a profit. Here, the trader is bullish on the market and expects it to grow. Most traders trade with this strategy, irrespective of the financial asset, be it stocks or commodities and expect the market to grow. 

Here’s an example of longing cryptocurrency

Let us suppose you but 20 Etheruem coins at $2,000 each, investing a total of $40,000. Now, you expect the prices to grow, and as expected, the price increases to $2,500 per coin. Now you sell all your open positions and get a total return of $50,000, where you make a profit of nearly $10,000 (minus the platform fee). As we see above, in the long cryptocurrency strategy, you buy low, wait for market growth, and sell at a rising price.

On the other hand, as we discussed above, when you are shorting cryptocurrency, you expect the prices to drop so that you can buy the asset at a lower price. As we see, cryptos are sold at a high cost, waiting for market drop, and purchased at a lower price.

Here’s a similar example for cryptocurrency shorting

Let us suppose you borrow 20 Etheruem coins and sell them at $2,000 each, receiving a total of $40,000. Now, you expect the prices to drop, and as expected, the price decreases to $1,800 per coin. Now you buy 20 coins at $1,800 each, spending $36,000, and return them to the original lender. You make a profit of nearly $4,000 (minus the interest and the platform fee).

One key thing to note when longing vs shorting cryptocurrency is that in the long strategy, the maximum loss you can incur is the asset’s price (assuming it reaches 0), while there is no limit to the profits in case the prices rise. However, in shorting cryptocurrency, the maximum profit you can generate is the asset’s price (assuming it reaches 0), while there is no limit to the losses if the prices rise.

How to Short Cryptocurrency?

Now, you have done the research, selected the coin you want to short and have a thorough understanding of the market. But, ‘How To Short Cryptocurrency?’. When it comes to shorting cryptocurrency, there are a few avenues that you may explore. However, these methods require different degrees of skill, so choose effectively. So, here’s how you can short cryptocurrency.

Shorting via a Cryptocurrency Exchange

There are multiple exchanges on the market that help traders buy, hold and sell cryptocurrencies. If you are looking for crypto exchanges that allow shorting, you are in good luck. Many prominent exchanges offer short selling cryptocurrency options. Cryptocurrency shorting on Binance, Bitfinex, Kraken and many other exchanges is extremely easy, and you can start shorting cryptocurrency in just a few clicks.

Short Sell CFD

Contracts For Different (CFDs) stipulate that instead of borrowing cryptocurrencies, selling them and then repurchasing them at a lower price, you can just pay the price difference at the start and the end of the contract. Therefore, in the case of CFDs, you don’t short crypto by going through all the steps, but short sell CFDs by betting against price rise.

Put Options

Options trading is a prominent strategy in stocks and has made its way in cryptocurrency as well. Many cryptocurrency exchanges offer Bitcoin options trading. Purchase of an option grants the ability, but not the obligation to a trader, to trade at a specific price by a certain expiry date. However, options trading is only recommended for someone with experience, as they are high-risk, high reward, flexible and complex.

When Should You Short Crypto?

When you are shorting crypto, you are trading against a long-term uptrend. Therefore, the longer you wait in a trend, the longer your risk becomes higher. As we stated above, the maximum profit you can generate is the crypto price if it becomes 0. However, there is no limit to losing money when you short cryptocurrency, as the prices can increase without a ceiling. Therefore, keep in mind the age-old saying, ‘prices take the stairs up, but the elevators down.’ this means that while upward price runs will take time to build up, downward price falls can be relatively fast and steep. 

Therefore, look out for trend changes, especially when it comes from bull to bear. This is the right time to sell your crypto, as the prices will now fall. When you are shorting cryptocurrency and are looking to exit, look for trend changes from bear to bull, as the prices will increase. Also, make sure you understand that many traders are riding short on an asset, especially Bitcoin. A sudden price surge may trigger many traders to close their positions early and buy the asset, extending the upward trend. This is known as a short squeeze and may result in grave losses.

Tips On Shorting Cryptocurrency 

Here are some tips to remember while you short sell crypto

  • Choosing The Right Exchange: Many crypto exchanges allow shorting, but it is crucial to select the right platform where the contracts are robust, transaction speed is high, and the fee is as low as possible. Choosing a sub-standard exchange or platform can result in minimised profits or losses. Shorting on Binance, BitMEX, and ByBit is very common, and you can do your research to choose the right platforms.
  • Don’t Short Sell A Crypto With Low Liquidity: When you are shorting cryptocurrency, choose a coin that has a high market volume, as you will see regular price fluctuations. In the case of a coin with low market liquidity, price changes are nominal and infrequent, resulting in losses.
  • Always Be Ready For Trend Changes: If you are shorting crypto or trading crypto in general, always be ready for significant market events that trigger market trends. For example, there have been major sell-offs in the past, which crumpled the prices of Bitcoin. They may be fake news, rumours, or even government action against crypto. On the other hand, there have been major buy-offs (Tesla buying $1.5 Billion In Bitcoin), increasing the price. Therefore, be ready for these trends always.
  • Most Cryptos Are Linked To Bitcoin Price: Bitcoin is the biggest cryptocurrency in the world, and if you decide not to play with BTC shorts but short another crypto, make sure you remember that Bitcoin’s price fluctuations usually drive the market. If Bitcoin is riding high, almost all major coins witness an uptrend and vice versa. Therefore, always remember the risks while betting against Bitcoin.

Final Thoughts

Shorting crypto is a remarkable strategy when it comes to making money with cryptocurrency trading. Even though it poses a risk of extreme losses, it has been time and again proven in various financial assets that shorting is a viable strategy if the traders know when to short and when to not. But in cryptocurrency shorting, you can earn money even when the market is bleeding, as shorting primarily depends on a market drop. However, this strategy is not recommended for new investors as it involves high risk and a significant degree of trading experience to be able to predict the market movement correctly.

If you are still learning how to short cryptocurrencies effectively, make sure you minimize risk with some strategies that are suitable for beginners. With this article, we hope we were able to help you understand the basics of crypto shorting and the best ways to short sell crypto.

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