Crypto shorting, also known as short selling, is where you bet that the value of cryptocurrency is going to be less in the future. Rather than buying it cheap and selling it dear, you borrow cryptocurrency at an expensive price, sell it, and subsequently purchase it cheaper and return it to its owner. Your profit is the sell price minus the buying price Let's illustrate it using an example. Let's assume that Bitcoin is priced at $30,000. You borrow 1 BTC and sell it for $30,000. At a later time, it falls to $25,000. You purchase it back, repay the 1 BTC to the lender, and you get to pocket the $5,000 as profit. That is shorting in action.
Why Do Traders Short Crypto
Shorting allows traders to gain from even decreasing markets. Short selling has been employed in traditional finance for decades. Short selling is becoming increasingly popular in crypto, as prices tend to move rapidly and experience regular declines. Here are several reasons why traders short crypto:
1 - To gain from declining prices in bear market scenarios
2 - To cover other investments and limit likely losses
3 - To capitalize on volatility in both directions, not only on upside movement
But it is not risk-free. If it rises, rather than falls, your losses can accumulate rapidly. That is why it is crucial to know what you’re doing and manage your risk.
How Works Shorting In Crypto?
There are various methods of short crypto, and each has different instruments and platforms to use. Following are the most prevalent options:
Margin trading
Margin trading allows you to use borrowed money to trade more than you possess yourself. Most of these exchanges, such as Binance, Kraken, and Bybit, provide this option. By borrowing cryptocurrency and selling it, you can create a short position. You close it by purchasing it back to settle the loan afterwards. Remember that margin trading means paying interest on borrowed capital as well as liquidation in case of an unfavorable trade.
Futures Contract
These are contracts to sell or purchase crypto at an established price in the future. You become "short" by selling a contract. You can purchase back the contract at a lesser price when it falls, and you keep the difference. Binance Futures and CME (for bitcoin futures) platforms enable you to trade such contracts. Futures tend to carry leverage, which means your gains and losses may quickly grow.
Options contracts
Options provide you with an opportunity, but not an obligation, to sell an item at an agreed price. A "put option" lets you sell cryptocurrency at an established price even if market price drops. Such an option is safer than trading on the margin or trading futures. Options trading is also supported by platforms such as LedgerX and Deribit, albeit in a more complicated form that's best for seasoned traders.
Inverse ETFs and Tokens
Inverse tokens, which trade up when the price of the underlying cryptocurrency drops, are provided by some platforms. A 1x short token of Bitcoin, for instance, rises when Bitcoin depreciates. They are simpler to use than derivatives or margins but might involve charges and are best suited to short-term trades.
A Short History Of Shorting In Crypto:
Shorting became increasingly prevalent in crypto following 2017 when larger crypto exchanges began selling futures and trading on margins. Previously, nearly everyone simply purchased and kept crypto.
Platforms That Permit Shorting Of Crypto
The following are some of the most well-known platforms where you can short cryptocurrencies:
Binance: Provides futures and margin trading with various leverage options.
MEXC: The highest leverage (up to 500 inclusive) and 0 commission for 100+ pairs
Bybit: A leading platform for trading futures that provides sophisticated tools.
OKX: Provides high liquidity options of perpetual swaps and futures.
BingX: Futures on popular cryptocurrencies and even precious metals
dYdX: A trading platform for perpetual trading and margins, decentralized.
GMX: A decentralized perpetual exchange on Arbitrum and Avalanche
Every platform has distinct features, fees, and supported tokens, so comparing them is well worthwhile before making any decision.
Risks Of Shorting Crypto
While shorting is lucrative, it's also dangerous. In contrast to getting into crypto where you can lose no more than what you invest, shorting contains unlimited downside potential. If it rises, you can continue to lose money indefinitely. Here are some main risks:
*Liquidation: Once your position is extreme in the wrong direction, the exchange can close it by force.
*Margin calls: You could be required to deposit additional funds to offset the position.
*Borrowing expenses: You'll be charged interest on borrowed funds, which cuts into profit margins.
*Extreme price fluctuations: Crypto is extremely volatile. A sudden pump can liquidate a short position.
*Exchange risk: Loss of access to position in case of platform malfunction or freezing of withdrawals
That's why it is important to employ stop-loss orders, correct position sizing, and risk management when shorting
Shorthand Strategies In Cryptocurrency
If you’re considering shorting, these strategies might be of interest to you:
Technical analysis
Many traders employ charts in identifying patterns and signs that indicate price declines. Moving averages, RSI (Relative Strength Index), and MACD are widely used indicators. For instance, if bitcoin is creating a double top and goes below support, that could be an indication to short it. Read more about it here.
News and Events
Negative information such as breaches of security, legal suits, or regulatory actions also cause price declines. Monitoring the news can assist you in picking up on shorting ideas. But beware - bad news is sometimes priced in, and the market responds otherwise.
Viking
Some investors short crypto not for profit, but to hedge current holdings. For instance, if you hold lots of Ethereum and anticipate near-term weakness, you might short ETH to cut losses. It is typical of long-term investors who wish to remain invested yet reduce risk.
Shorting in Decentralized Finance (DeFi)
You can short crypto without needing to utilize centralized exchanges, thanks to DeFi. Aave, Compound, and Synthetix platforms enable you to borrow tokens, trade synthetics, or establish short position Here's an easy-to-understand example in DeFi:
- 1. You put ETH into a lending protocol such as Aave
- 2. You borrow USDC collateralized by your ETH.
- 3. You invest in a short token or enter into a short position on a different DeFi platform using USDC.
- 4. When ETH goes down, you earn from being short while you pay back your loan subsequently.
The shorting of DeFi provides increased privacy and control, but risks include smart contract flaws and high gas prices.
Conclusion
Learning to short crypto unlocks new possibilities, particularly in an environment where crypto is well known to experience steep ups and downs. Regardless of whether you are employing leverage, futures, options, or DeFi instruments, shorting is always about thorough planning, analysis, and risk management. It is not something to attempt blindly. But as part of an appropriate strategy using the correct tools, it can be an effective addition to your traders toolkit.
FAQ
Is crypto shorting legal?
- Yes, it is legal to short crytpo in most countries, provided that the exchange you utilize is permitted to conduct business within your area of residence. Check local laws and regulation always.
Can you short crypto short of leverage?
- Yes, it is possible to short crypto using no leverage by selling assets you possess or using inverse tokens. But most strategies such as futures or margin trading include leverage of one type or another.
What is the best platform to short crypto?
- One platform isn't necessarily "best." ByBit, Mexc and BingX for generalized trading, dYdX and GMX for users of DeFi, choose according to experience, token of choice, and security requirements.
How much money do I need to short crypto?
- You can begin small, particularly on sites that permit small minimums. Just bear in mind that shorting is riskier, so you should use money that you can lose.
Is shorting cryptocurrency suitable for beginners?
- It is Shorthanding is more complicated and riskful than normal buying. New traders should experiment using demo accounts or trading small lots to start off. A strong suggestion is to study technical analysis and risk control before getting started.