What Is Crypto Shorting?

Crypto shorting (or short-selling) is a strategy where traders borrow cryptocurrencies from an online broker. They sell the crypto at a higher price and plan to buy it back at a lower price later. If the price drops, the trader can make a profit from the difference.

Crypto shorting explained

Here’s an easy example:

Imagine Bitcoin (BTC) is priced at $61,000. You think the price will fall, so you borrow 1 BTC from a broker and sell it for $61,000. A little later, the price drops to $54,900. You use the $61,000 to buy back 1 BTC at this lower price, making a profit of $6,100.

Why Short Crypto?

Leverage in crypto trading

6 Ways to Short Crypto

This is when you borrow money or crypto from a broker to trade. You need to deposit some funds as collateral. This allows you to trade with more money than you have. If the price drops, you can make a profit, but if it goes up, you can lose money.

In the futures market, you don’t actually own the crypto. Instead, you buy a contract that bets on whether the price will go up or down. To short, you sell a futures contract, betting that the price will drop.

This type of trading involves buying options contracts (call or put). A put option allows you to sell a crypto at a specific price in the future. If the price drops, you make money, but if it doesn’t, your losses are limited to the price you paid for the option.

In prediction markets, you can bet on future events, like whether a cryptocurrency’s price will fall. If the price drops as predicted, you win the bet.

This is the simplest method: you sell a crypto at a certain price, wait for the price to drop, and then buy it back at a lower price. However, this method can be expensive due to storage and custody fees.

A CFD lets you trade based on the price difference between when you open and close the contract. You don’t own the crypto but make money if the price goes down. CFDs often require margin and can have different rules in each country.

Costs of Shorting Crypto

Just like any trade, shorting crypto comes with costs:

How Much Can You Make from Shorting Crypto?

You can make significant profits shorting crypto if the price drops by a good amount. For example, if the market falls 10%, you can earn as much as you would by buying (going long) and the market rises by 10%. However, keep in mind the fees, as they can reduce your profits.

Risks of Shorting Crypto

Shorting crypto is risky because the market is unpredictable. Here are some of the risks:

Unlike buying crypto, where the price can only drop to zero, shorting can lead to unlimited losses. For example, if the price of Bitcoin goes up instead of down, you may have to buy it back at a much higher price and lose a lot of money.

When using margin (leverage), even small price changes can lead to large losses. If you use 5x leverage, a 20% price increase could wipe out your entire investment. It’s important to be cautious with leverage, especially if you’re a beginner.

Crypto risk management

Conclusion

Shorting crypto can be a way to profit from falling prices, but it comes with high risks. It’s important to understand the different methods, such as margin trading, futures, and binary options. Always remember to factor in fees, and be cautious of potential losses, especially if you’re using leverage. Only trade with money you can afford to lose, and consider using shorting strategies as a way to protect your investments rather than rely on them for major profits.