Shorting Cryptocurrencies | How | When | Why | Beginner Guide

Tarulika  |  Jul 7, 2020

Cryptocurrencies have the historic year of skyrocketing prices of 2017. Bitcoin was invented in 2009 with a price of a few cents and presently it is worth thousands of dollars. Investors did not take the Bitcoins seriously initially but as the marketplace started extending, cryptos have become the instrument to earn huge profits. Various techniques, analysis reports, trend studies and many more methods have been deployed to earn from cryptocurrencies. One of them is “shorting cryptocurrencies”. In this article, you will learn about the shorting and how, when, why and many more questions related to it.

What Is Shorting Cryptocurrencies?

What does shorting of crypto mean

In simpler terms, “shorting” can be defined as betting for the bearish trend (falling prices) of any asset. Being short on cryptocurrencies or shorting Bitcoin means that the trader considers the price of the particular instrument which is being traded will fall and tries to earn from the falling prices of that asset. Generally, traders tend to sell high and buy low to make the profit from a change in the price of the cryptocurrency. Investors open a short position or sell trade which could be Bitcoin, Ethereum, Litecoin or any other currency with the aim to earn profit from the dripping down prices. To get the more clear idea of shorting, let us find out the working behind shorting currency in the next section.

How Does Shorting of Cryptocurrencies Work?

How does shorting work

When you are allowed to borrow an asset like Bitcoins and sell them at their current price, shorting works. Later on, you have to purchase the Bitcoins to pay back to the lenders (from whom you borrowed the money). Now when you repurchase the Bitcoins after some time (when the prices are dropped), it might be cheaper to buy the assets needed to pay back. For instance, let us consider that you short sell about 10 Bitcoins when the prices were at $4000, i.e. you borrowed 10 BTC and sold them for $40,000. Now, after some time, the price of Bitcoin drops to approximately $3500. Then, you grabbed the opportunity and repurchased 10 Bitcoins to give back the assets to your lenders. Thus, you earned a profit of almost $5000 with the help of shorting coins. This is how shorting of cryptocurrencies work.

How To Short Sell Cryptocurrencies?

Methods to short crypto

There are a number of methods to short sell crypto assets like options, marginal trading, futures contracts and many more. Let us discuss some of the methods in brief.

Digital Exchanges

One of the simplest ways to short crypto assets is on crypto-asset exchanges either by the method of leverage trading or by marginal trading. For instance, BitMEX, Bitfinex, Poloniex and many more. Firstly you have to borrow a crypto asset from margin lenders to sell the asset which is not owned by you and then buying the asset back once the target price is achieved to sell back to the lender. The backend of the process is handled by the exchange and a borrowing fee will be charged for each day of shorting the assets. The profit or loss will be the difference of price short sold at and the price at which the asset is back (deducting margin lending fee) differing from platform to platform. While using the option of leverage, your profit or loss can be magnified by the ratio you choose.

Crypto CFDs

The Contract for Difference can be used to short cryptocurrency with the help of online brokerages like CMC Markets. Investors comfortable with online brokerage trading may find the option of CFD as the most suitable one. It is a similar process like that of short currencies on an exchange but the profits are paid in fiats rather than digital currencies. You just need to click on the “Sell button” on the cryptocurrency CFD of your choice at the price level one you want to short it at.

Crypto Futures

Crypto Asset derivative trading platforms can also be utilised to short cryptocurrency as it can be utilised to sell the crypto futures. Platforms like Deribit, Quedex can be utilised to sell crypto futures. Futures are financial derivatives which allow traders to purchase or sell the asset at an already defined price at a predetermined date in the future which would allow the investors to bet for development of the asset without owning it.

Put Options for Buying Crypto

Financial options can also be a good way to inculcate the potential profit from bearish markets. Options are also financial derivatives which can provide holders with rights but not with the obligation to purchase or sell a crypto asset at a specific price on an already future decided date. Options are a comparatively inexpensive way to short crypto assets as you only lose the premium if the option got expired and the strike price won’t be met. Looking for the technical aspects, putting options is better for advanced traders than novices. BitMEX is one of the specialised crypto exchanges that offer you to short the currencies with the help of options.

Exchange-Traded Notes

Shorting cryptocurrencies can be done with the help of Exchange Traded Notes (ETNs), one of the regulated financial products. For instance, service providers like Bitcoin Tracker One, Ether Tracker One by XBT provider and many more. You just need to have a brokerage account for supporting crypto exchange-traded notes for short selling.

Wrapping Up

Short selling of cryptos is undoubtedly profitable but can be a little risky if not done cautiously. You need to be careful while shorting the Bitcoin either by yourself or via crypto brokers. Just invest as much as you can afford to lose without trapping yourself into the trap of lucrative profits. This is true that you can even earn from bearish markets but you must constantly track the markets and analyse the charts or can just sit back by dedicating the task of selling the coins at a predetermined price with predetermined time to the exchanges.

Thus, crypto markets are full of opportunities either bearish or bullish, one only need to be updated with latest trends, announcements, services and products in the industry.

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