If you’re new to trading cryptocurrencies then chances are that you haven’t fully come to understand all the different terms and trading techniques that will turn you into a successful trader.
Chances are that you may have recently heard about “Shorting” your crypto assets.
However, if you’re confused about what this means, or simply don’t understand how to short your crypto assets, then we’ve created this guide which will help you to understand what shorting crypto means, as well as some of the ways that you can do it!
What Is Short Selling?
Short selling is a trading strategy used which is often used to profit from a market that is seeing a significant fall in price.
By short-selling, what happens is that you sell a borrowed asset, hoping that the price will go down further, allowing you to then buy it back at a later date for a profit.
This practice has a few other names, such as ‘going short’, or ‘shorting’.
This is usually a practice in shares but has also become commonplace in crypto (see also ‘What Is Shilling Crypto?‘), and forex markets too.
How Does It Work?
As the trader, you borrow the asset from a broker, and then immediately begin to sell it at the market price, but since you don’t own the asset, you will likely have to pay a form of lender’s fee.
Once the trade has been closed, you then buy the asset back at its new price and return it back to the lender.
If the market prices then falls, you will then profit from the decline in price. However, if the price rises, you will have to pay it back at the new, higher, price.
Why Short Sell?
Short selling is done for two particular reasons, hedging, and speculation.
But it also provides a big advantage too, as short selling actually helps to increase the number of trading possibilities.
With this additional form of market movement, it means that there is even more movement for traders to speculate on than there was before, and it also means that there is a possibility of traders making money even if the overall market price is falling.
Hedging is also a way of short selling and means that traders are able to protect themselves from losses to a long position.
If you’re planning to go long on a certain asset, the fall in market price would therefore have a negative effect on your holding, so a short position would help reduce some of this impact by quite a bit.
Disadvantages Of Short Selling
There are some disadvantages to short selling that you should be aware of if you plan on doing it at some point.
This is particularly important to consider if you’re looking to short sell some of your assets, and that’s because the potential loss from short selling is actually limitless.
This might sound extreme, but because you never truly know how an asset’s market price is going to change or fluctuate, if the price of the asset suddenly skyrockets, then you’ll be forced to pay it back to the lender.
Furthermore, when this sort of thing happens, it creates what is known as a short squeeze, where all the people who have shorted the stock begin to try to cover themselves at the same time, which then only pushes the price up even higher, and exacerbates your losses even more.
Therefore, if you are going to short sell an asset, you should have a risk management plan in place ahead of time.
How To Short Crypto Stock?
So if you’re an investor in a number of crypto assets and you believe that the market is going to crash at some point in the near future, then your best option might be to short the stock.
There are a number of ways that you can do this, so if you’re looking into ways that you’re able to short your crypto assets, then read on below to find out how!
Perhaps one of the easiest ways for you to short your cryptocurrencies is through the use of a margin trading platform.
This sort of trading is offered by a lot of the various brokerages or exchanges, and works by allowing traders to “borrow” the money from the lender in order to make the trade.
As previously mentioned, you should consider the risks associated with margin trading as you’re using borrowed or leveraged funds, which although could see a decent return in profit, could also potentially lead to massive losses.
Both Binance and Kraken offer this service currently.
Some cryptocurrencies, such as Bitcoin, have a futures market.
In this type of trade, a buyer will purchase a security that comes with a contract, specifying when the security will be sold, and the price that the security will be sold at.
So by buying one of these security contracts, you are essentially betting that the price of the security you have bought will increase, which will ultimately ensure that you get a better deal once you get it back.
By selling a futures contract, it means you have a bearish mindset and believe that the market is going to witness a significant drop in value.
You can therefore short your cryptocurrencies this way by purchasing a contract that bets on a lower price.
This form of shorting became increasingly popular when cryptocurrency prices began to rise significantly in 2017, and is now available across a wide range of trading platforms.
So whether you’re looking to buy or sell security contracts, you shouldn’t have much of a problem finding a place to do it!
Binary Options Trading
Another way you’re able to short your cryptocurrency is through binary options trading.
Call and Put options are excellent ways of shorting and are relatively easy to understand too!
To short a currency, you’d have to execute a put order, which would likely involve making use of an escrow service.
Which would then mean that you plan on selling your currency for today’s market price, irrespective of whether the market price drops later down the line.
There are quite a few places that provide binary options trading, however like most methods of shorting your cryptocurrency, there are quite a few risks involved.
But, it can also be very advantageous, as you are able to limit your losses by opting not to sell your put options, which means you can then limit the loss to the price you paid to begin with.
Prediction markets are exactly what they sound like, and work by placing bets on the outcomes of events, and are another effective way to short your cryptocurrency.
These tend to occur when investors create an event, and invite people to make wagers based upon what they think the outcome is going to be.
An example of this is if you were to predict that a certain currency, say Bitcoin for example, was going to decline by a certain amount, whether it’s a margin or a percentage.
Then, if someone agrees to the bet you’ve made, you’ll then make a profit if this bet comes true.
If you feel like this is a way that you’d like to short your cryptocurrency then there are a few different platforms to choose from, notable ones being GnosisDAO, Augur, and Polymarket.
Simple Short Selling
The traditional high risk high reward method of short selling is one that is well documented, but if you’re able to stomach the possible risk that comes with short selling then you should trust your intuition and go for it!
Remember, that you’re essentially betting against the market price rising, so you should try to do some research and look into market forecasts before you leap into doing so.
Remember, short selling a cryptocurrency can incur a lot of risk and potential losses, you may end up having to pay wallet fees or a custody fee in order to store the currency until the trade happens, and the volatility of the cryptocurrency itself could also cause you to lose out.
But whilst some exchanges do offer some leverage for these trades, this too can also lead to exacerbating your losses.
Contract For Differences (CFDs)
A contract for differences, otherwise known as a CFD, is a financial strategy that pays out the difference between the opening and the closing price of a settlement.
CFDs have also become an option for trading cryptocurrency, and is a great way of shorting your crypto, and is similar to the futures market as you are essentially betting on the fall of the market price of the particular currency.
These settlements tend to be slightly more flexible than a futures contract, as CFDs don’t have predetermined settlement dates.
In addition to this, some markets will even allow you to enter a CFD contract based upon market performance or performance in comparison to another currency.
Inverse Exchange-Trade Products
Inverse exchange-traded products are essentially a bet on the decline of an underlying asset’s price decline.
They are somewhat similar to future contracts and in fact use some future contracts alongside some other derivatives in order to help to provide returns.
However, this is a fairly limited option if you’re looking to short your cryptocurrency as it is only available for Bitcoin currently.
If you’re U.S based, then you can use the ProShares’ Short Bitcoin Strategy ETF.
Things To Consider When Short Selling
When it comes to short selling, there are a few considerations to make before you proceed, so have a look through our list to make sure you make an informed decision.
Most of the avenues for shorting cryptocurrency is based entirely on the volatility of the asset and the market, and the potential fluctuations in the price of a market is what can lead to either great profits or massive losses.
So be careful when deciding to short sell especially volatile cryptos such as Bitcoin.
Cryptocurrencies haven’t been around for a particularly long time, which in comparison to other, more traditional assets, which makes them a much riskier choice to try and short sell.
This is because there simply hasn’t been enough time elapsed for there to be an informed decision to be made about the feasibility of crypto as an asset or its workings.
There are a few issues to be resolved before cryptocurrency becomes truly recognized as a feasible asset, so it might be best to wait in the meantime.
Many cryptocurrencies, even Bitcoin, still don’t have a full regulatory status in certain regions and countries, despite its claims that it has coverage worldwide.
As a result of this lack of regulation, sometimes some of the exchanges that are offered wouldn’t actually be allowed if there was a regulatory body and the sheer lack of clarity means that legal recourse for anyone who purchases these exchanges is extremely limited.
Short Selling Tips
So if you’ve decided you’re going to go ahead with short selling your crypto (see also ‘How To Sell Crypto On Crypto.com‘), here’s a small list of tips to keep in mind as you do so:
- Make sure to do a complete and fundamental analysis on the market you’re going to be shorting in before you go ahead with it.
- The larger your position size, the higher the risk, but lower risk might ultimately mean you make very little profit.
- Ensure that you arrange to have trading alert notifications active on your phone so you can know when the market reaches a certain level so you can make a decision on how to act.
- Trailing stops are convenient and will follow your position if you earn a profit, and will also close it if it reverses.
- You should also place guaranteed stops in order to close your position when it reaches a chosen point.
In summary, short selling is a great way to profit from even a bear market (see also our article on death crosses), just be aware of the risks!