How to Short Cryptocurrency

Shorting cryptocurrency is a complicated process for new traders, but it can create profits. In this guide, we'll explore how to short cryptocurrency in detail.

  1. Comparing Long and Short Positions in Investment Strategies
  2. Why Do Traders Long or Short Cryptos?
  3. How Does a Trader Long Cryptos?
  4. How Does a Trader Short Cryptos?
  5. Margin Trades
  6. Betting and Prediction Markets
  7. What Constitutes an Effective Short Strategy?
  8. How to Short Bitcoin as Part of Your Trading Strategy
  9. Shorting Altcoins: How it Works
  10. Why Short Selling Bitcoin Could Lead to Negative Outcomes
  11. Can you Start Shorting Cryptocurrency on Binance?
  12. How can You Short on Bitfinex?
  13. How can You Short on Bittrex?
  14. How can You Short on BitMEX?
  15. How to Begin
  16. Conclusion

One of the most volatile markets is cryptocurrency. With Bitcoin or one of the many other crypto coins, the rate can change multiple times per day: they can show growth, decline, increase again, and so on.

It’s well known that the movement on any exchange occurs with use of retail orders (representing a market obligation), the volume of trading instruments purchased or sold, for which no offset transactions have been made.

To keep a profit that’s stable, it’s vital to ensure that orders are opened, closed, and changed properly. The ethos of profitable trading is pure: you buy cheaply, you sell expensively, and you make money from it. This is why short and long commercial operations are undertaken on stock exchanges.

Below, we’ll take a closer look at longing and shorting cryptocurrencies.

Comparing Long and Short Positions in Investment Strategies

A lot of people believe the term “long” suggests long-term opening positions and that “short” relates to opening deals classed as short-term. However, they’d be wrong: people utilize long strategy when they’re looking to invest in cryptocurrencies, so long is always about purchasing assets.

In other words, long is a strategy involving the trader (or a bot) opening positions to buy a crypto while counting on its market value to increase. That means that, with BTC/LTC when we have Bitcoin, the trader or trading bot assesses when they can enter the position itself.

When this passes through, they wait for the rate to increase, the BTC to LTC to grow, and then, ultimately, it’s ready to be sold.

Shorting Cryptocurrency Defined

What does it mean to short cryptocurrency?

Opening a short position involves borrowing the cryptocurrency and selling it on the stock exchange at its present price.

Once the value decreases, the trader purchases the crypto at a lower rate, pays the borrowed funds back, and pulls in a profit on the difference between the buying and selling cost.

Why Do Traders Long or Short Cryptos?

A trader will open shorts when they’re sure that a specific financial instrument’s price will drop. They will borrow securities on sale from a broker, and when the asset’s exchange rate sinks, they will redeem them and repay the debt at a lower value. The trader’s income is the main benefit of selling and purchasing.

When the securities reach their minimum price, that’s when the time is right to make long. Stock exchange assets are bought at a low cost, and the trader will wait for the growth in quotations before selling the securities. They will earn money from the difference between buying and selling.

How Does a Trader Long Cryptos?

The easiest investment strategy is to take a long line on cryptocurrency: in this case, you’ll invest in the cryptocurrency as its value can rise over time.

This involves trading coins, ensuring that you hold ownership of the money and the income will be calculated on the coins’ market value. Traditionally, this is the low-buy and high-selling approach to technology innovation.

How Does a Trader Short Cryptos?

Traders need to possess the skills and awareness for analytics and making predictions to short cryptocurrency effectively. That means that not everyone will be capable.

People who trade professionally understand industry newcomers’ psychology, and know when they'll sell currency and when they’ll play shorts. Experienced players will wait for such opportunities and begin the “compression” process: this enables them to achieve the most income from the pressure on market orders created.

Traders can avoid losses by making sales at the top of the rally rather than entering the market during the moments when short positions are processed.

It’s better not to start working at the exchange at the moment of opening short positions in the trading session’s first and final hour, which can be filled with false movements market players like to make.

Instead, it’s best to concentrate on the time zone of the exchange’s headquarters or its core audience. Otherwise, traders could be in danger of losing their position.

A Short but Important Shorting Cryptocurrency Rule

Anyone using “short” trading positions would do well to remember this easy rule: even if a cryptocurrency’s value drops by half, you won’t earn more than 50%, while losses will be 100% if the price increases by a factor of two.

So, you have to take great care in this “lowering game”, as the crypto market has stunned even the most experienced traders with the speed of its trend changes.

Margin Trades

Many people start offering Bitcoin by utilizing a margin trading stage dedicated to cryptos. This is the simplest type of short cryptocurrency trading: you borrow money from a broker and perform the trade with faith that the wager will ultimately pay off.

There’s a huge range of cryptocurrency margin trades available, and you may find it hard to know which are most worthy of your time. But here are the best trades right now:

  • Binance

  • Bitmex

  • CEX IO

Understanding Contracts For Difference (CFDs)

A Contracts For Difference (CFD) is popular in financial subsidiaries exchanges: the contracts within the settlement between the opening and closing exchange costs are settled with cash. CFDs involve no conveyance of physical products or securities.

Many experienced dealers use this advanced exchange procedure, though it’s not permitted inside the U.S.

What are Futures?

In standard money-related markets, derivatives are used as hypothesis objects and protection against potential misfortunes, with the latter known as support. One prevalent subsidiary type utilized for deals is known as futures: this can be a contract between a pair of parties in which one agrees to pay the other a specific amount of money for a primary resource at a certain point.

The Bitcoin futures’ contract is just what you’d expect trading money with Bitcoin. It can be a contract that enables you to purchase Bitcoin at a predetermined price and time in the future.

For example, let’s say the cost of Bitcoin today is $8,000 per BTC. You expect it to reach $10K per BTC in one month. In this case, entering into a contract that enables you to buy Bitcoin at $9K in one month becomes incredibly appealing.

So, Bitcoin futures are an up and coming option within the developing cryptocurrency subordinates market.

Betting and Prediction Markets

Another way to think about Bitcoin shorting is through Prediction Markets Business research. They haven’t been a part of the blockchain landscape for long, but they can prove beneficial for cryptocurrencies such as Bitcoin.

These markets let participants create events based on results: you could predict that Bitcoin will drop by a specific percentage of a margin, and you would be able to profit if anyone took you up on your bet. Predictable is an indicator of a Bitcoin prediction market, and you can choose from a number of popular prediction markets, including Bet Moose and Weathbet.

What Constitutes an Effective Short Strategy?

When you short Bitcoin, you’re exchanging against a long-term uptrend: the longer the slant stays in place, the less secure it continually gets. Here’s a key point to consider — the highest potential benefit of a short is limited to a Bitcoin value of zero, while there are no profit restraints for buyers.

Spend long enough looking at Bitcoin cost charts and you’ll realize the truth of the ancient exchanging proverb: price takes the stairs but up the lift down. While bullish moves can take time to create, bearish moves are typically quite quick and sharp.

It can be intense trying to short well, and you’ll probably stop a number of times while Bitcoin continues to rise. Remember that an increase in cost could occur as certain dealers vye to close their shorts (i.e. they buy those Bitcoins they sold back).

Understanding Short Offer Opportunities

It’s beneficial to understand the Bitcoin environment well beyond just technical analysis. For example, here are some of the varied occasions and how they’ve affected the price of Bitcoin:

Previous occasions activating large sell-offs:

  • Significant exchange failures

  • Major nations conducting hostile administrative activity

  • Reputable designers stopping the Bitcoin advancement group (such as Gavin Andresen and Mike Hearn)

  • Increased hard fork dangers, such as Bitcoin forking off into Bitcoin Cash)

  • Delays or complications caused by important overhauls

Events expected to have a negative effect on price:

  • Any unwelcome or complex fork

  • A breach of the cryptographic primitives used in Bitcoin

  • The discovery of code exploits in Bitcoin, which compromise wallet security

  • Governments conducting hostile activities against Bitcoin

  • Movement within to start with a million or so BTC mined by Satoshi Nakomoto

Events that have a minor effect on cost:

  • The decline of darknet markets such as AlphaBay

  • Claims to have anonymized Satoshi Nakamoto (e.g. Dorian Nakomoto or Craig Wright)

  • Hostile proclamations made by financial analysis, financiers, writers, lawmakers, etc.

How to Short Bitcoin as Part of Your Trading Strategy

Let’s look at the top spread methods for making shorting part of your own trading strategy:

Tax management

Adopting short positions can help to reduce tax bills by having an effect on overseeing capital gains. It can be hard to find capital misfortunes to alter capital pick up amid bull markets, but shorting can be a way to cancel out taxable pick up in such cases.

This is particularly valuable with regards to short-term capital gains, which are saddled at a stronger rate than long-term ones.

Diversification

Due to long and short positions on various securities, fund diversity has managed to reduce risk significantly. To begin with, a number of cryptocurrencies tend to run in parallel: long on Bitcoin and short on Ethereum could secure your investments against certain market forces that may affect the whole cryptocurrency ecosystem in the future.

Choosing a direction

Shorting enables traders to keep trading, whether you consider the market to be up or down. Should a trader get persuaded that rates should drop instead of rise, they could boost their income by shorting Bitcoin (rather than using a hold approach).

Shorting Altcoins: How it Works

Looking to generate profits while the cost of Altcoin drops? It’s possible. A short on Altcoin suggests that you believe a drop in the Altcoin price is coming. Essentially, short positions work by selling the base asset and buying it back.

How can You Short Ethereum?

Ethereum (ETH) will sometimes deal with other cryptos in currency pairs, not just with national currencies such as EUR or USD. A dealer who believes ETH’s value will drop compared to Bitcoin can only purchase Bitcoin and swap it for ETH once that value drop has occurred. This isn’t exactly short, but it does allow for gains from a drop in ETH’s price.

How can You Short Litecoin?

If you keep Litecoin (LTC) already, pass the sum of LTC to the exchange for CBP. Sell the amount (there’s a charge of 0.3%) or implement a purchase cap and pay the exchange fee of 0%. Place your purchase order for the same amount at the lower cost.

What Dangers are there in Shorting Bitcoin?

This all hinges on your stake’s scale: it’s recommended that you think about using someone you have trust in to take the other side and make it as a prop deal, with modest amounts (such as $10).

Why Short Selling Bitcoin Could Lead to Negative Outcomes

Shorting may not lead to the profits you expect in two scenarios:

No drop in price

Sadly, this is the worst of both scenarios, and suggests that the trader has made a poor prediction of how the situation will unfold and wrongly identified the crypto’s current trend. The price will not have dropped but actually stayed at 10 BTC, which should be returned (with interest).

The price drops but at a lower rate than expected

Let’s say Bitcoin has fallen to $6800 instead of $6500 with no likelihood of falling again soon. The rate enters an upward trend once more, and if the trader aims to generate even a minor profit on the shorting, they will need to pull the deal immediately.

The difference in rates will create a profit of $2000, with almost $1700 directed to commissions and a net income of only $300. Should the rate sink to $6800, the commission will devour all the profits from shorting and the trader will be left to pay the loan debt.

How can You Short Kraken?

This is your entry for trading Kraken:

  • Choose sell order

  • Choose limit order

  • Choose 2x leverage (needed to go short)

  • Look into the current price

  • Choose the share number (three or four, for example)

  • Set the sell price to make sure the order is filled

  • Assess your order once

  • Assess your order a second time for peace of mind

  • Now, confirm

To exit Kraken trading:

  • Choose buy order

  • Choose limit order

  • Choose 2x leverage: on Kraken settings, a leverage will exit margin trades no matter what the value

  • Choose the share number (three or four again, as required)

  • Set the buy price

  • Check your order

  • Check your order again

  • Confirm

How can You Short on Poloniex?

Three accounts are set up for each trader on the Poloniex exchange: exchange, margin, lending.

The exchange balance includes the funds you use for standard trading in the Exchange section. The margin balance has funds used for servicing borrowed money. The lending balance has funds you can lend to others to achieve profit from the turnover.

Can you Start Shorting Cryptocurrency on Binance?

Binance offers you the opportunity to short on cryptocurrencies. Short is used to open a deal and lower the rate, either manually or using a bot.

This is how it works:

  • You sell the coins

  • The bot places a buy order

  • The bot implements a safety order to sell: if this works, it will update the buy order and place new safety orders as required

  • Once the buy is complete, the bot will cancel the safety orders

Using a bot can make trading easier, eliminating the need to track the market round the clock. However, make sure you research the bots available to you, and explore those best suited to your goals and trading habits.

How can You Short on Bitfinex?

To short cryptocurrency on Bitfinex, fill your Trade bag with cash: this backs up the loan and is removed if a loss occurs. It deals with BTC/LTC only.

When you’re sure it has been identified, input a sale number and place your order on the sector or a restricted order at a fixed rate. It will initiate a loan, and you’ll borrow BTC/LTC immediately to join your position in the process.

How can You Short on Bittrex?

Traders can either borrow cryptocurrency from Bittrex itself or another user. The lender will get interest for borrowing its assets and the borrower can utilize the funds however they like. When shorting, the borrower will buy the crypto that drops in profit value.

How can You Short on BitMEX?

Bitmex is the last real alternative for cryptocurrency shorting. It exists in a gray area: people in the United States are unable to take advantage of Bitmex in theory, but a lot of traders use VPNs to bypass regulations. Bitmex sells quick BTC contracts that are highly leveraged. You simply pick the type of contract and power, finance it, then strike it.

How to Begin

Generally, beginners are advised not to try shorting, though they can attempt to short “calm” coins with a rate that’s more predictable. For beginners, the shorting plan flows like this:

  • Pick a crypto that’s known in the market: you can’t use ones that are newly baked, as the trader won’t have a base for studying market dynamics

  • Assess how the coin’s value has shifted, what factors have been connected with deep correction periods, and the price’s sharp drop (i.e. running a fundamental analysis of the crypto)

  • Wait for a price drop related to the factors that worked previously

  • Use margin trading to purchase the crypto before its price drops: you’ll have to keep track of market news and watch market activity to understand the nature of the cryptocurrency’s price dynamics

  • Sell the coins following a sharp jump in price

But for beginners, it’s even better to try your hand on short+long. This strategy can generate a profit with the right approach, and will help you understand how the market functions and how the crypto price is formed. You can advance to shorting when this level is taken.

Conclusion

Shorting is regarded as an effective way to make profits on cryptos. But it can be far more risky to short Bitcoin (or other cryptocurrencies) than long-term investing or averaging.

Seasoned traders believe shorting can lead to profits of 7 to 10% of the invested amount under the right conditions. However, not all investments are made independently but via borrowed funds, which can reduce the problem of initial investment significantly.

Still, the amount of profit achieved depends on the amount the trader has access to. If they can borrow 10 BTC, they could have the opportunity to pull in thousands of dollars, but the profit is less likely to be impressive if they have only 1 BTC.

Nevertheless, only traders with experience should attempt to short cryptocurrency and work with sizable funds. If they feel sure they can analyze the cryptocurrency market dynamics properly and enter the market on the clear downtrend, they could expect to earn 7 to 10% on shorting due to the difference in rates.

Again, you may want to try auto trading bots to help you generate profits on cryptocurrencies. Spend time researching your options and consider how well a specific one will suit your trading preferences before you take the plunge. Speak to others in your position, and with your level of experience, to gain valuable insights. This can help you make the smartest decisions.