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What Does Shorting a Cryptocurrency Mean?
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What is Shorting Crypto and How Can I Do It?

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With 25+ years of financial marketing experience, Niki has an extensive knowledge of the forex, fintech, stocks and cryptocurrency sectors. Niki is a founder and director at the Contentworks agency.
By Niki Nikolaou
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With 25+ years of financial marketing experience, Niki has an extensive knowledge of the forex, fintech, stocks and cryptocurrency sectors. Niki is a founder and director at the Contentworks agency.
on March 07, 2023 | 5 min
Updated on Jan 22, 2024
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Charles Archer
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Charles Archer is an experienced financial writer specialising in monetary law. With a background in stock market and private equity analysis, he’s worked for many years as a freelance investment author, and has had articles published in a wide range of regional and national titles, both online and in print. He holds a Master’s degree in Law from the University of Law, the UK’s largest legal training institution. Charles believes the key to successful investing lies in quality research, and aims to offer a unique viewpoint that investors cannot find elsewhere.
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The 24-hour crypto volume stood at $80.88 billion on February 17, 2022, despite the decline in prices of some of the big cryptos. The volume isn’t surprising because the digital currency market has evolved into a distinct asset class with diverse instruments that help traders take advantage of both bull and bear runs. As a result, there were 56.02% short trades on the day. Short selling is a trading technique to make the most of a downtrend. This article describes what shorting in crypto is, when and how you can short crypto, and some popular strategies to help you.

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What Does Shorting a Cryptocurrency Mean?

Short-selling or shorting in crypto means selling an asset high and then buying it back when the price dips. Although it may seem counterintuitive for beginners, it helps traders speculate on a downward market movement. Here’s how it works:

 

When a trader predicts that the price of an asset is likely to drop, they borrow it then sell it (or its derivative) at the current price. Once the price does decline, they then buy it back more cheaply, at the new price point, then return the borrowed crypto to the lender. Profits banked if it works out – if it can’t be sold at a cheaper price, the short seller must take a loss.

How to Short Crypto?

High volatility makes cryptocurrency shorting a popular trading technique. Here’s how you can take advantage of declining prices:

Use a Contract for Difference (CFD)

CFDs are contracts between a trader and their broker or crypto exchange. They allow traders to speculate on both rising and falling asset prices.

Use Options

Vanilla options are agreements or contracts between traders to buy or sell an asset at a pre-determined price within a given timeframe. These contracts give you the right to buy or sell the underlying asset, but you are not obligated to execute the order. This means that you have the option to let the contract lapse, in case the market moves against you.

There are two kinds of vanilla options. While a call option gives you the right to buy the cryptocurrency, a put option can be taken for shorting crypto.

Use Futures

Futures are contracts to buy or sell an asset at a predetermined price on a predetermined date. They are cost-effective since traders do not have to pay any upfront amount other than the transaction fee and funding rate. But futures contract can also be riskier because of the higher probability of forced liquidation if the account balance goes below the margin requirement.

Direct Short Selling

This requires a trader to own or borrow the cryptocurrency they wish to short. They sell the coin at the current price and buy them back at a lower price. This method requires more upfront capital, since only a few cryptos have high liquidity (needed to sell and buy at will), and they are costlier. Additionally, there is a risk of losing your holdings if the price rises, rather than falling.

How Does Shorting Crypto Work?

High volatility makes cryptocurrency shorting a popular trading technique. Here’s how you can take advantage of declining prices:

Example 1 – CFDs

Suppose the current price of BTC is $10,000 and you expect it to decline to at least $7,800 in the near term. You can enter a contract with your broker that the price will decline. If it does, you earn the profit as per your contract.

 

To manage the risk, you could place a take profit at $8,000 (just to be safe), which will close the position automatically when the price hits the pre-decided level. To protect against the price moving up, consider placing a stop loss at $10,500 so that the position is closed automatically, and losses are minimised.

Example 2 – Options

Let’s say Bitcoin is trading at $25,000 and you expect it to decline to $24,500 in a week. You can buy a put option that expires one week later, with a strike price of $24,500. If Bitcoin moves below $24,500, your option is said to be “in the money,” while if it stays above your strike price, your option is said to be “out of the money.” With vanilla options, you don’t need to wait until expiry to execute the trade. If the market moves in your favour, you can close the option trade and realize your profit, even before the week is over.

Example 3 – Futures

They work very similarly to CFDs, although both are distinct markets.

Example 4 – Direct Ownership

Consider a trader with 100 ETH, who sells them at $4,500 per coin. When the price declines, they buy the ETH back at $4,000 per coin. So, the trader has gained $500 per coin and may even buy a few extra coins to enrich their portfolio.

Shorting Strategies in Crypto Trading

Popularly, shorting takes advantage of a market correction, after an uptrend. The most used indicators for crypto shorting are:

Head and Shoulders Pattern

The uptrend leading to a head and shoulders pattern signals that bulls might be unable to hold the trend for long. A shoulder is a small spike above a price level followed by an immediate decline. The head is a higher peak (twice that of the shoulder) followed by a steep decline. Finally, another shoulder with a similar high as the first shoulder completes the head and shoulder pattern. The base or neckline may not be straight. A decline after the second shoulder indicates a pullback and is considered a strong signal to short.

Double Top Pattern

Double tops are most useful when an asset is overbought, and bears pull the asset price back. A true double top will have a higher top first, followed by a trough and then a lower top, after which the price breaches the support level and falls.

Risks of Shorting Crypto You Should Consider

Short-selling crypto is an advanced trading technique that involves risk. Risk evaluation and mitigation are also critical given the high volatility of the cryptocurrency market.

 

  • Shorting with derivative instruments may amplify market exposure and, therefore, both profit and loss potential. This makes risk management indispensable.
  • Cryptocurrencies are unpredictable. Therefore, in-depth market study is needed to start shorting. Novice traders might make mistakes due to a lack of knowledge, experience, and an underdeveloped strategy.
  • Short-selling crypto using leverage incurs margin interest, which traders often fail to account for while estimating their position size.

Where to Short Crypto

To short digital currencies, look for platforms that provide a wide range of cryptocurrencies and have a good reputation. You can also find a few that are regulated in the region you are trading from for added trustworthiness.

What Platforms Allow You to Short Crypto?

Top platforms for shorting crypto using CFDs

Eightcap, Pepperstone, XTB, eToro and Capital.com.

Top platforms for shorting crypto using options:

Binance, Bybit, Robinhood, Deribit and OKX.

 

Note that American exchanges give a choice to sell before the contract expiry date as well. European exchanges, on the other hand, allow the execution of put calls on the specific expiry date alone.

Top platforms for shorting crypto using futures:

Bybit, Rollbit, BitMEX, Phemex and OKX.

Pros and Cons of Shorting Crypto

  • Shorting helps traders make the most of crypto volatility.
  • Shorting helps hedge against market downturns.
  • Derivative instruments offer exposure to the crypto market because they don’t require traders to own the underlying asset.

The main con of shorting crypto is that, as the asset class is prone to explosive price increases, your potential losses can be very large. Downwards price movements can also tend to be much larger and faster than upwards movements, making them very challenging to trade.

The main con of shorting crypto is that, as the asset class is prone to explosive price increases, your potential losses can be very large. Downwards price movements can also tend to be much larger and faster than upwards movements

Shorting crypto summary

Shorting enables traders to take advantage of downwards price movement, potentially doubling profit opportunities over traders who are only looking to the long side of the trade. As cryptocurrencies are a nascent asset class, the frequency and size of downturns tend to be much higher than in the traditional markets. This offers numerous opportunities to make the most of market moves.

FAQ

  • Is it legal to short cryptocurrency?
    Yes, it is legal to short cryptocurrency. However, traders must adhere to the compliance requirements of the region from which they are placing trades. Additionally, the digital asset markets are not regulated, so due diligence at the trader’s end is essential.
  • Is short selling crypto profitable?
    It can be profitable. Shorting is an advanced technique to earn from a declining market. Carefully taken positions with strategic risk management measures may be profitable when backed by thorough fundamental and technical analysis.
  • What is the best way to short crypto?
    There is no single best way to short crypto. Individual trading styles, risk tolerance levels and trading goals help determine whether one should choose options, futures, CFDs or directly buy and sell on an exchange.
  • Is it easy to short crypto?
    No, it is not always easy to short crypto. Trading has a learning curve as it involves capital and market risks. Short selling is an advanced technique. Therefore, practising on a demo account to build a strong strategy is very useful.
  • Can you short without leverage?
    Certainly, leverage is an option but not a requirement. You can short-sell crypto that you own without the need for leverage.
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About Niki Nikolaou
With 25+ years of financial marketing experience, Niki has an extensive knowledge of the forex, fintech, stocks and cryptocurrency sectors. Niki is a founder and director at the Contentworks agency.
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