Shorting Crypto
First Published date: 29. August, 2022Last Updated: 27. February, 2023Fact-checked by Adrian Müller
Cryptocurrency trading is becoming increasingly popular among investors. However, shorting crypto assets is a different beast. Before deciding to short crypto, you must understand the risks and rewards of this type of trading.
This blog explores the basics of short-selling crypto assets, how to do it safely, and the pros and cons of shorting crypto. With the proper knowledge and strategy, shorting crypto could be a profitable way to trade in the crypto markets.
Table of Content
What Is Shorting Crypto?
Crypto shorting is a powerful trading strategy that allows you to profit from cryptocurrency price drops. It is known as short-selling or “shorting.” This process involves borrowing a certain amount of cryptocurrency from an exchange, selling it at its current market price, repurchasing it at a lower price, and returning it to the exchange.
By doing this, the trader profits from the difference between the two prices. To better understand this, let’s look at an example. Say you’re interested in shorting Bitcoin (BTC). You must borrow some BTC from an exchange and sell it at the current market price.
If the market price of BTC drops, you can buy back the same amount of BTC at a lower price and return it to the exchange. Importantly, any profits you make are yours. With crypto shorting, you make money even when the market is decreasing.
Crypto shorting can be an astoundingly lucrative way to profit from the ever-volatile cryptocurrency markets. Despite its potential to generate quick profits, you must remember there is always a risk of sudden price spikes. These spikes could lead to significant losses instead of gains.
For this reason, it is vital to research and fully understand the risks and rewards associated with crypto shorting before engaging in the market. Experienced traders may find this strategy particularly appealing. However, it is essential to remember that it comes with risks. Make sure you’re willing to take on these risks before getting involved.
6 Ways To Short Crypto
There are many ways to short crypto. Different investors employ different strategies. There is no shortage of options, from margin trading and future market trading to future predictions and CFDs.
Different strategies can be fruitful if done correctly, and luck favors. Here are 6 effective ways to short crypto:
1. Margin Trading
Margin trading is one of the most popular and potentially profitable ways to trade cryptocurrency. With margin trading, you open a leveraged long or short position on an asset by borrowing funds from a broker.
Using leverage can amplify your returns on a slight price movement. However, margin trading can be risky because any unfavorable market movement could result in significant losses. Make sure you understand the risks associated with margin trading before getting started.
2. Futures Market
The futures market provides an opportunity to speculate on the future price of an asset by trading contracts that are settled at a future date. Using this type of trading, you can take advantage of market movements by shorting crypto – buying a contract at a lower price and re-selling at a higher price, thus making a profit from the price difference.
Additionally, this type of trading allows you to hedge your portfolio and manage risk. Although it sounds risky, no crypto shorting strategies are risk-free.
Investment of any type comes with some risk. Therefore, consider future market trading as an option for crypto shorting.
3. Binary Options Trading
Binary options trading is an innovative form of trading allowing you to capitalize on price movements in an asset without having to purchase the asset itself. With binary options trading, you predict the direction of the asset’s price, making a profit if you are right.
When trading binary options, you can take a ‘short’ position by choosing a ‘Put’ option. Here, you are betting that the asset’s price will decrease. If your prediction is correct, you can reap the asset’s price movement rewards and make a profit.
4. Prediction Markets
Prediction markets are derivatives instruments enabling traders to speculate on the future value of an asset. These markets are similar to futures contracts but involve betting on an investment’s future price.
As a trader, you can take advantage of prediction markets to go short on crypto assets by betting that the asset’s cost will decrease. This type of speculative trading allows traders to generate returns in a rising or falling market.
5. Using Inverse Exchange-Traded Products
For investors wanting to capitalize on the decrease in the price of an underlying asset, inverse exchange-traded products offer an attractive investment strategy. In contrast to traditional investments, these products are speculative and utilize futures contracts and other derivatives to generate returns.
ProShares’ Short Bitcoin Strategy ETF (BITI) is an exchange-traded product for those in the United States. However, investors outside the US have two other options to access inverse exchange-traded products:
The Canadian BetaPro Bitcoin Inverse ETF (BITI) and the 21Shares Short Bitcoin ETP from the European Union. Both products provide a range of investment opportunities to those wanting exposure to the inverse of traditional investments.
6. Using Bitcoin CFDs
You can use Bitcoin CFDs (Contracts for Difference) to speculate on the price of crypto without actually buying or selling it. With CFDs, you can profit if you accurately predict the direction of the crypto price movements.
Furthermore, CFDs allow you to take advantage of rising and falling crypto prices, maximizing your profits regardless of market direction. Start trading Bitcoin CFDs today, and take advantage of the potential profits in the crypto markets.
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Factors To Consider When Shorting Cryptocurrency
There are some critical factors you must consider when shorting cryptocurrency. This is because cryptocurrency is unlike anything else, so you should not take it lightly.
Without understanding properly, investing in cryptocurrency can be extremely risky. Here are some important factors to consider before shorting crypto:
1. Cryptocurrency is Volatile
When shorting cryptocurrency, you must consider the asset’s volatility. Cryptocurrencies are prone to having extreme highs and lows in a short time. Therefore, keeping a close eye on the current market conditions and being prepared to react quickly to sudden changes is necessary.
Understanding technical analysis and risk management will help you make the most informed decisions. This is because getting the right information is the precursor to making the right decision.
When dealing with something as volatile as cryptocurrency, you must know the risks and how to handle them. So get a clear idea about volatility before you start shorting cryptocurrency to minimize potential losses.
2. Cryptocurrency Is Risky
You need to understand the associated risks when considering whether to invest in cryptocurrency. Since cryptocurrency is still a relatively new asset class, several risks must be considered.
These risks include the possibility of sudden devaluation, liquidity issues, and the lack of regulation. Despite the potential rewards of investing in cryptocurrency, investors should be aware of the risks and be ready to make educated decisions before entering into any transactions.
3. Cryptocurrency Is Not Regulated
It’s important to understand that a government or regulatory body does not currently regulate cryptocurrency. This means that when investing in cryptocurrency, investors are taking on greater risk compared with more traditional investments.
As such, you must do your due diligence and carefully research the asset before entering any cryptocurrency transactions. Additionally, you must find a reputable and reliable cryptocurrency exchange to ensure your funds are handled safely. Doing so helps minimize the risk associated with investing in cryptocurrencies.
Risks Of Crypto Shorting
The main risk associated with crypto shorting is that it is highly volatile and carries the potential for significant losses. If the cryptocurrency price rises after the trader borrows it, then the trader must repurchase the cryptocurrency at a higher price, leading to a loss.
The more the price increases, the greater the loss. Additionally, crypto shorting requires margin trading, which comes with risks. These risks include the possibility of your broker liquidating your position if it falls below a certain level and the potential for increased volatility because of market forces. Therefore, it is essential to thoroughly understand all risks before engaging in crypto shorting.
Margin trading is an advanced form of trading in which an investor leverages their fund to purchase a larger amount of cryptocurrency than they would typically be able to afford. This allows them to take on greater positions, increasing the potential for higher profits. However, this also increases the potential for losses, as the investor must pay back the loan with interest or face potentially severe losses.
Since crypto shorting is a highly volatile market subject to extreme price fluctuations, a trader’s position can be liquidated quickly if the market moves against them. Although using stop-loss orders can minimize this risk, it can incur significant losses. Therefore, margin trading is a high-risk, high-reward strategy and should only be used by experienced traders.
Crypto Shorting Strategies
Although different investors employ different strategies, some common ones are frequently used, easy to predict, and risk-free.
Two essential strategies for successful crypto shorting are the head and shoulder pattern and the double top pattern. Let’s take a look at them briefly:
Head And Shoulder Pattern
The Head and Shoulder Pattern is one of the most reliable and widely used cryptocurrency shorting strategies. This pattern occurs when the price of a cryptocurrency moves in a downward trend and then rises back up, only to drop again.
By recognizing this pattern, you can anticipate when the price will drop again and enter a short position for maximum potential profits. This pattern is an essential tool for any serious trader because it helps you to make informed and profitable trading decisions.
Double Top Pattern
The double top pattern is a powerful crypto shorting strategy that will help you take advantage of market fluctuations. When the price of a cryptocurrency moves up, down, and then back up again, it can be a sign of an impending price drop.
Recognizing this pattern allows you to enter a profitable short position when you are correct. Using the double top, you can capitalize on any price drops and secure profits.
Should You Short Crypto?
The answer depends on your overall trading strategy and risk tolerance. Shorting crypto can be lucrative, but it is a risky venture. You must weigh your risk tolerance and understand how to manage the risks associated with it beforehand. While some traders discover success shorting crypto, it’s crucial to understand the potential pitfalls before diving in.
Factors such as the coin’s volatility, liquidity, and trading volume are key determinants before committing. By understanding the risks and rewards of shorting crypto, you can make an informed decision about the right choice. It’s also necessary to understand the technical aspects of shorting crypto.
Before you start trading, becoming familiar with the different trading platforms and tools available and understanding how they work is important. Also, thorough research to ensure the coin you’re trading has enough liquidity to provide you with a profitable opportunity. Proper research beforehand will help you avoid potential losses and ensure successful trades.
Conclusion
Shorting crypto can be a lucrative way to speculate on the crypto markets. However, you must be aware of the risks involved, as it can be challenging to predict the market direction.
Before attempting to short crypto, conducting your research and understanding how the markets and exchanges work is essential. With the proper knowledge and strategy in place, shorting crypto assets can be a profitable way to trade the crypto markets.
About the author – D. Schmidt
I’m a German stock trader who has lived around the world. I travel extensively and believe that my experiences give me a unique perspective on global markets. I love trading! It’s always exciting to see what happens next. My goal is to help people understand the game so they too can enjoy it to the fullest. In this blog, I will share some tips and tricks that helped me along the way.
