How to short crypto to make profits? The crypto market is known for its extreme volatility as well as its other intrinsic characteristics and features.
This means that a particular crypto coin that has a high price today may experience a steep fall tomorrow which can be unexpected and unimagined.
In fact, the prices of crypto coins may vary all through the day!
Add to this, there are the regulatory actions that may result in retracements and price crashes after a big rally.
In order to avoid incurring losses in such situations, crypto investors often rely on leveraging the concept of short selling.
In order to put in a few simple words for you to understand, it can be said that shorting crypto is a special form of crypto trading where you sell your crypto assets when the price is still at a high because you expect it to fall soon.
This process allows the investors to make money even when the prices of crypto coins are falling, and, for that, they do not even need to own them.
You can buy them back at a lower price later on though. There are two specific reasons to short crypto.
One, there is a fear in the market and among the people of missing out, and two, a retracement after a price rally.
If you are wondering whether or not you can short sell your crypto, then the answer is: yes, you can but make sure you know the nuances and tidbits of it very well.
Without having proper knowledge about short selling crypto, you may make a start at least but do not expect to gain the most out of the benefits that this advanced trading strategy provides.
If you want to ensure that then you will have to take help from articles like this that will cover every aspect of shorting crypto along with its pros and cons.
How to Short Crypto to Make Profits?
Today short selling crypto is a common practice and is also an easily accessible crypto investing approach with different marketplaces offering a large number of resources.
These marketplaces are making it simpler for the borrowers and lenders to find each other and take advantage of the towering interest in short selling crypto.
In this process, as said earlier, you buy crypto when the price is high and sell it off when the price falls without actually owning them.
You simply borrow it from a broker and give them back.
An example will make things clear for you.
When you intend to short sell one Bitcoin when the price of it is $45,000 and expect it to fall in the next couple of days, you borrow a coin from the broker and sell it off at that price.
When the price falls, say to $40,000 after a few days you borrowed the coin, you buy it back and give it to the broker.
You therefore make a profit of $5,000 in the process.
However, you will also have to pay an amount as interest for the amount you borrowed from the broker.
Short selling crypto involves some risks because the crypto market, as said earlier, is volatile and unpredictable.
But still, it offers a high profit potential in spite of the fact that the likelihood of incurring hefty losses is just as probable.
Meaning of Shorting Crypto
This process is called short selling crypto because you are actually ‘short’ of the coins and you do not own them really but still intend to make profits on them.
Short selling crypto is actually done by borrowing the coins.
You will understand the meaning of short selling crypto as well as the process if you have a fair bit of knowledge about long and short positions in crypto.
Typically, a crypto long position refers to buying crypto coins when you expect the market value of the coins to rise upward.
And, when it does, you sell them off in order to make a profit.
On the other hand, the current price of a crypto coin may drop when you hold a long position.
In such a situation, you may not make any profits but you will certainly not lose your original investment.
However, when you are shorting crypto, the price of the coin may rise for an indefinite period. This will increase your losses.
That is why you should research a lot before you start short selling your crypto.
If you feel that the price will fall for sure, you can go ahead with it and take a calculated risk.
This will surely allow you to make thousands of dollars in profits.
Reasons to Short Crypto
There may be varied reasons given by the crypto traders for short selling crypto coins.
The reasons differ according to the amount of profit they want to make from short selling their crypto assets or on the type of analysis they might have made.
However, here are some of the most common reasons given by the crypto traders to favor crypto short selling:
- Valuation – There may be times when a particular crypto coin may be overvalued or may be in a price bubble at a specific period in time. The crypto traders want to make the best use of this trend and short sell their crypto in order to make profits. In such situations, they wait for the retracement to commence. They usually follow the basic trading style while short selling crypto based on the valuation metrics and evaluate the intrinsic value of the specific crypto coin against its prevailing market price. It makes them aware of the right time to buy back the crypto coins they borrowed.
- Volatility – This is the primary concern of most of the risk-averse crypto investors but it is also a characteristic that a few other investors with a higher risk appetite leverage in order to make profits. They are the ones that rely on the price history of crypto coins which can fall as quickly as it can rise. They are naturally drawn to such fluctuations in crypto prices and expect to gain potentially huge rewards. However, you will need to have a fair bit of knowledge about the changing market trends and also have some expertise in using the volatility of cryptocurrencies to their advantage.
However, crypto short selling needs hedging the risks involved in it.
This is because it may affect your long positions negatively in spite of the fact that you opted to short sell your crypto due to its volatility aspect.
This is because, if your prediction is right, the profit you make from short selling your crypto may end up exceeding or reducing the loss in your long position.
In other words, this means that it is always prudent to have a hedging strategy in place so that you can minimize the chances of incurring huge losses, especially in a bear market.
Methods to Short Crypto
In simple words, short selling crypto is just the opposite method of going long on crypto.
It is quite a different method in comparison to those ‘pump and dump schemes’ where a group of investors raise the price of a crypto coin artificially and then sell it at this high price.
There are different methods of short selling crypto but the newest one is via a margin trading platform.
This form of trading allows the investors to borrow from a broker.
There are also a few margin trading platforms that may allow you to short sell your crypto coins with futures contracts.
In this form you agree to buy or sell the coin at a set price and on a predetermined date.
However, there are a few steps to follow, one by one, in order to start, continue and make profit from crypto short selling. These are:
- First, you will need to find and select a trend after proper and careful analysis because the volatile crypto market is influenced by a number of external factors. These can be any news, politics, and even a celebrity culture. It will all influence the price of a crypto coin.
- Next, you have to open a margin trading account with a broker exchange but make sure that you abide by the rules and regulations in your country regarding crypto trading. For example, you cannot trade derivatives on crypto any longer if you are an investor from the UK.
- Then, make sure that you minimize your chances of incurring any losses on your short positions because this market is known for price turbulence. Therefore, limit your exposure and use stop losses and crypto shorting calculators.
- Finally, open your position with the coin you are interested in but make sure that you have the entry and exit points well-determined.
Now that you are ready to short sell your crypto, it is time to choose the right method for it.
You can choose any of the following methods according to your preference and convenience.
- Direct Short Selling – This is the most common method followed where you simply borrow the coin from a broker and sell it at a certain price. Then you wait till the price falls, buy it back, and return it to the broker and keep the margin between the buying and selling prices as your profit.
- Futures Markets – In this process you buy a security on an agreement or contract that specifies the time and price at which you want to sell it off. Here you expect the price of the security to increase at the time of selling.
- Contracts for Difference – Commonly known as CFD, this is also one of the most popular ways to short sell crypto coins. In this method, the broker will allow you to bet on an increase or decrease in the price of a crypto coin without you needing to actually own it. The exchange or broker will demand a part of the fund of the margin account as deposit or collateral but it remains in your possession. This guarantees that you will buy the coin at the specific price you are betting on. In this process, to open your position, you supply only a small portion of the total trade amount. This amplifies your ROI or Return on Investment when the price of the crypto coin moves in the direction that you have predicted.
- Crypto Put Options – You can follow this option when you deal with multifarious derivatives in a bear market. Though it is not an obligation, this option will give you the right to buy a crypto coin on a predetermined date and price. You can even sell the coin. In this process, you have a higher chance of making profits and the best part of it is that even if the price of the coin stays high, you will not lose anything more than the option premium. This is actually the fee that you pay to hold your position.
- Prediction Markets – Here you can interact with the other crypto investors when you short sell your crypto. These markets are pretty similar to the traditional mainstream markets. In this process, you will have to simply predict that the price of a specific crypto coin will fall by a particular margin or percent and then another person takes you up on that specific bet. You make a profit if the price moves that way.
- Binary Options – This is a good option to choose if you are interested in conducting a short term trade with a limited amount of risks involved in it. In this particular method there are actually two particular outcomes. One, you make a profit as you have predefined, and two, you lose your money paid when you open the trade. This process follows the concept of call and put options where the put order is executed by using other services or an escrow. The primary objective of this method of short selling crypto is to sell the asset at the current market price even if it falls later on.
Whichever method you choose to short sell your crypto coins, there is a varied amount of risks involved in each.
If you want to avoid incurring huge losses, here are some expert tips that you may consider following before and during the process.
You must look at the past performance of the coin you choose to short sell and use technical analysis to predict the behavior of the market and the coin in the future.
Based on the Dow Theory, technical analysis will take everything into account right from the coin pricing, regulations in the market, current and past demand of the coin, and the trends, both in the short-term and long-term.
For a proper technical analysis, you should look into a few specific indicators for proper prediction of price crashes and retracements.
Some of the useful indicators are:
- Average Directional Index or ADX to know the strength of a particular trend
- Bollinger Bands to know the low or high of the price on a relative basis
- Standard Deviation to know the rate of ROI and
- Relative Strength Index or RSI to know the magnitude of any recent price change.
You may also use a few statistical tools for the same purpose such as:
- Time Weighted Average Price or TWAP
- Volume Weighted Average Price or VWAP
- Fibonacci Ratios and Extensions or FREs and
- Moving Averages or MAs.
However, all these will need some learning since these are complicated statistical concepts, but if you can do that, you will surely be able to make some smarter investments and more profits.
Also, stay updated with the news surrounding the crypto market along with political and economic events, government crackdowns, and regulations so that you can capitalize on the current situation at its best.
This will also let you avoid troubles due to violation of government guidelines.
And, if you intend to sport sell your crypto during unexpected rallies due to FOMO or Fear of Missing Out you should conduct fundamental analysis to know the intrinsic value of the crypto coin you want to short sell.
If you want to make the right investment decision, this will help you to know the forces that drive the demand and supply of the coin you are interested in short selling. Some of these forces are:
- Market sentiments
- Adoption of a coin and
- Transaction activities.
Once again, you will need to use different metrics for your fundamental analysis. Some of these metrics are:
- On-chain metrics or the blockchain data
- Transaction count or number of transactions made on a network and
- Transaction value or activities on a network.
With all these done, you are eventually ready to start your venture.
In order to start short selling your crypto assets, you should follow a few simple steps which include:
- Logging into the exchange you have chosen
- Creating a margin account
- Searching for the best trading pair interface such as the BTC/USD
- Selecting one between cross margin and isolated margin and finally
- Clicking on the ‘Transfer’ button to send the collateral to the crypto exchange.
After that you will need to set up an ‘Auto Repay’ order when you begin automatic borrowing.
As and when the price drops, the amount that you took on loan from the crypto exchange will be automatically repaid.
Sometimes, when the price moves in the wrong direction, you will however have to repay the loan amount manually.
Major Exchanges to Short Crypto
As it is, to invest in or trade with crypto, you will need to find a reliable crypto exchange first in order to get the desired results and stay away from scams, frauds, hacks and other issues that may result in the loss of your crypto assets altogether.
Similarly, there are a few specific crypto exchanges to choose if you want to short sell crypto such as:
- Binance – This is the largest crypto exchange of the world considering the trading volume and they have recently included margin trading in their platform.
- Bybit – This exchange has gained a lot of popularity in a short time and has also included margin trading in their platform for 6 specific crypto coins as of now. However, it is not accessible to the customers residing in the United States unless they use a VPN or Virtual Private Network service to get around this restriction.
- Kraken – This is one of the largest Bitcoin and Altcoin exchanges in the United States. It is also the largest crypto exchange in terms of EUR volume. It offers margin trading of crypto along with different leverage options on different pairs for the users to take advantage of.
- BitFinex – This is also a well known crypto exchange operating since 2012 and catering to the trading needs of basic and advanced traders as well as the large institutions. It allows the users to margin trade via its P2P margin funding service offering up to 3.3 times leverage, long or short, on more than one hundred assets.
- OKEx – Operating since 2014, this crypto exchange is the second-largest one in terms of amount. However, accessibility to this exchange may be limited due to its stringent usage guidelines. It offers 3x to 5x leverage options in BTC, ETH, LTC, and EOS which you can exchange for BTC or USDT.
These crypto exchanges are recommended because all of them have a reasonably high trading volume and therefore you can expect to have maximum liquidity.
There are also several others out there that allow short selling crypto coins but you are advised to do your due diligence and research before you finalize on anyone other than those mentioned above.
There are different advantages of shorting crypto.
However, this is an advanced crypto trading strategy that should be followed only by the experienced crypto investors to reap the benefits to the maximum.
Some of the major upsides of it that you can enjoy if you get it all right are:
- You will have much higher profit potential
- You will need limited capital for it
- You will be able to leverage your investment and
- You can short trade your crypto on multiple trading platforms.
On the flipside, just like any other trading, short trading crypto also comes with its characteristic downsides of which the major ones are:
- You will need a margin account to start short selling
- Margin interest incurs with it
- Incurring unlimited losses is an equal probability and
- Its short squeezes.
Remember, the losses in short selling crypto depend on your initial investment.
If the prices of currencies rise, you will need to borrow it at a higher rate so that you can lower the average cost and cover it without incurring any losses.
On the other hand, if the prices of currencies do not rise as expected, you will have to sit on it for a long time and expect the price of the crypto asset to rise.
While and if that happens, the interest will also keep on piling up at the same time thereby eating a major portion of your profits.
So, after going through the article you must have gained sufficient knowledge about the ways to short sell your crypto if you have to.
This knowledge will help you to stay competitive and perform just like the experienced crypto investors.
I have special interest in crypto and intend to help common people to gain knowledge about the digital asset as well as its potential. Follow Me at Linkedin.