Before we describe how to short cryptocurrency, let's first define shorting. Traditional trading boils down to the simple premise of "buy cheap and sell high."
Again, in the most simplistic terms, shorting is the inverse of this: purchase high and sell cheap. This is done when you predict prices to decline. In this manner, you might profit from a depreciating asset.
Let's investigate this method further.
Short-selling is often referred to simply as "shorting." Simply put, this is an investment technique in which an investor profits when they anticipate a decline in the price of an asset.
But why is it referred to as "short selling"? The reason for this is that investors are short, i.e., they do not actually possess the asset they wish to sell for a profit.
This approach is utilized in the field of cryptocurrencies. However, it is not unique to cryptocurrencies. This technique consists of borrowing an asset and then selling it at the current market price.
Later, you repurchase the borrowed assets from the lending institution. When it becomes necessary to repurchase these assets, the prices fall as projected.
Theoretically, you will have paid less for the assets than you received when you sold them. And this is how investors make a return on an asset they have not yet purchased.
Let's put things into perspective with a straightforward illustration.
Keep in mind that the setting in the preceding example was ideal. In general, the greater the price decline following a short sale, the cheaper it becomes to repurchase the item and the greater the profit.
However, what happens if the price of Bitcoin rises after you sell short? Or the organization from which you borrowed requests you to buy back the assets you shorted before the price reached your target level? Herein resides the risk.
When it comes to short selling, gains are typically capped, while losses are unrestricted. This is an essential concern, especially when dealing with an asset as volatile as cryptocurrency.
Using the same example as before, let's speculate on what might have occurred if the Bitcoin price had instead climbed to $2,000 per Bitcoin.
Now you may be giddy with excitement and can't wait to attempt shorting for yourself. Encryption. Of course. However, can cryptocurrency ever be shorted?
The brief answer is "yes."
If you followed the preceding example, you saw that we mimicked shorting Bitcoin, a cryptocurrency.
As you may be aware, there are numerous ways to begin trading cryptocurrencies, including mining, purchasing, and others.
Shorting cryptocurrency is an additional strategy open to traders, although it is far more difficult than the trading cryptocurrency itself.
This is because you require a substantial amount of capital to get started. Additionally, you must be able to accurately estimate whether the value of your preferred cryptocurrency will increase or decrease.
Here are various techniques to short cryptocurrencies:
Now that you have a better understanding of shorting cryptocurrency, you may like to learn how to accomplish it.
Initially, you must locate a trading platform that allows you to place a short sell order, or, even better, a platform that automates the process. Then, there are numerous techniques to short sell cryptocurrency.
People frequently short-sell cryptocurrencies in margin accounts. This is likely the simplest technique to short-sell cryptocurrency. Margin trading entails borrowing crypto from a broker in order to trade.
Within this sort of trading, you must borrow or leverage funds. This trading strategy is intended for more experienced traders.
Therefore, having an automated trading platform execute it on your behalf could be advantageous. You may have heard of our BOTS app, in which automated bots trade on your behalf.
Given that shorting generally entails greater risk and takes a certain level of competence, it may be prudent to delegate this task to automated trading bots that conduct the work ON YOUR BEHALF.
Although the BOTS app does not presently include short-selling bots, the team is constantly trying to add more asset classes. Stay updated!
CFD is an abbreviation for Contract for Difference. This means that instead of borrowing cryptocurrency, selling it, and then repurchasing it at a lesser price, you agree to settle for the price difference.
Therefore, with a CFD, you will receive the difference if the price falls. Without the inconvenience of selling and buying back coins.
Using the services of businesses like as eToro, Plus500, and others, you can short with a CFD.
However, you should be informed that this type of trading is intended for seasoned investors. It has substantial hazards.
Crypto Binary Options are another method for shorting cryptocurrencies.
In this sort of trading, you estimate whether the price of a cryptocurrency will increase or decrease by a specified time. Was your forecast accurate ("In the money")?
Then you will receive the option's payment. If not ("Out of the money"), your investment will be forfeited.
With binary options, only two outcomes are possible. You either win or lose.
The hazards of shorting cryptocurrencies are very apparent. If you wager that the value of a cryptocurrency will decline, but it rises instead, you stand to lose.
How much you could lose depends on the precise instruments or procedures used to open a short position and the amount at risk.
Consider the following: if you use margin to purchase $1,000 worth of Bitcoin and Bitcoin's value decreases by 50% overnight, your investment is now worth $500, and you owe $500 plus interest to the exchange.
Shorting any security, including stocks, involves comparable risks. But crypto's risks are significantly greater, considering that its market is highly volatile and almost unregulated.
According to some analysts, however, shorting can be advantageous to the financial markets.
Gabriella Kusz, CEO of the Global Digital Asset and Cryptocurrency Association, explains, "Shorting, for instance, can improve liquidity, raise the efficiency of stock prices, decrease market bubbles, and in some cases serve to prevent market manipulations."
Shorting may have a place in the market, but it does not necessarily mean it has a place in your investment strategy.
Shorting cryptocurrencies is feasible on a variety of exchanges and platforms, depending on the desired method.
For instance, prominent exchanges such as Coinbase and Kraken permit customers to purchase Bitcoin futures contracts.
Other traditional brokerages, such as TD Ameritrade, also provide these services. According to Eberle, shorting cryptocurrency can be a complicated procedure involving multiple exchanges.
"You may short genuine Bitcoin by posting collateral on platforms such as AAVE or Compound, then pay a variable interest rate to borrow WBTC, which is wrapped Bitcoin on the Ethereum network, and move it to a centralized exchange such as FTX or Coinbase," he explains.
He notes that this is a sophisticated strategy but one that traders may employ. Note that many larger platforms, such as Robinhood, do not provide margin trading in cryptocurrencies.
Therefore, you may need to conduct research to discover a platform or exchange that is compatible with the shorting tactics you wish to employ.
Shorting cryptocurrencies may yield quick profits, but it is an advanced approach. Cryptocurrency is a very volatile asset, so most people should generally avoid short-selling.
Fidelman advises avoiding shorting cryptocurrencies unless you are an absolute specialist on the specific cryptocurrency in question. "This is not a game for novices."