Disclaimer: This is for informational purposes and is not meant to serve as financial or investing advice.
In short (no pun intended), it does. If this is a strategy you’re considering, please keep reading this article. We are here for beginners that are looking for technical analysis.
We’ll give you an honest, thorough, and palatable explanation that involves six ways of short-selling cryptocurrency on a crypto exchange or trading platform. And if you enjoy this article, please don’t forget to share it with others. We’ll be grateful — and so will they.
Can You Short Crypto?
Yes, you can short-sell crypto. But we state this with caution, as the cryptocurrency market is full of volatility. Price movements on cryptocurrency exchanges can skyrocket or crumble in the blink of an eye. It’s stormy seas out there, for sure.
How Is Shorting Crypto Different From Shorting Stocks?
Let’s talk about short-selling stocks first. This is where you borrow securities (in other words, you haven’t bought them and don’t own them). In other words, you are now “short” these securities. But you sell them in the hopes their price will continue to drop.
If it does, you can buy that same security at a lower price than you sold it for. The ideal scenario is you pay back the loan and pocket the difference.
Short-selling cryptocurrency is similar but not entirely the same as what we described above. Here, you don’t borrow units of the currency from a broker. Instead, you use derivatives, like futures contracts or contracts for difference (CFDs), to short crypto.
So if you want to short bitcoin (BTC) or Binance or Ethereum, for instance, keep reading for further details.
(By the way, a derivative is a financial contract where the value depends on an underlying asset, group of assets, or benchmark. And a benchmark is a standard to which something is compared.)
Are you looking at terms like “futures” and “CFDs” and feeling confused because you have no idea what we’re talking about? Keep reading because we’re going to make everything plain.
What Are Some Ways To Short Crypto?
Successfully shorting cryptocurrency is rooted in strategy and experience. We hope you’ll talk to professionals (like us) before dipping your toes into this high-risk practice.
This is an article for beginners, so we will ensure everything is presented in layperson terms and makes sense as easily as possible. As promised now, here are some methods to short-sell crypto.
1. Margin Trading
Margin trading is where traders borrow money from a broker to make a trade. This borrowed money is called “leverage.” In short, you essentially gamble on crypto markets with this leverage. The term “margin” refers to the amount of crypto required to enter a leveraged position.
A note: Be careful with this one. For example, Coinbase recently announced ending their margin trading after communicating with Commodity Futures Trading Commission.
2. Binary Options Trading
This is where you speculate on the future price of a security (like bitcoin or Binance, or Dogecoin) and make a gamble. You bet either “yes” or “no” on a specific outcome. And it’s all tied to whether a price will rise or fall in a specified time. For example: Will the price of ABC cryptocurrency rise by 11:30 a.m. on Friday? Yes or no?
Once the allotted time expires, the trader either wins and collects their stake and profit or loses it all. Like the others, binary options trading is risky.
3. Futures Market
This is where a buyer and seller agree to a trade. Not now, but in the future with specifications like the exact time and at what price.
Here’s the gamble you face: If you enter into one of these contracts, you’re betting that the price of that asset will rise. You can secure a solid deal later and make a profit if it does.
4. Prediction Markets
This is where you make a prediction, as the name suggests. But you can make these predictions on future events outside the crypto market.
Some of these future events include presidential elections, sports outcomes, or who will win the Oscar for Best Actor. Of course, they can also bet on the price of crypto prices. You traditionally go with a binary bet, “yes or no,” and collect money if you win.
5. Using CFDs (Contract for Difference)
This is where buyers enter into an agreement directly with a broker instead of opening a position on a particular market.
The two parties recreate market conditions and settle their differences once the position closes. The broker charges the trader for the difference if that position closes at a loss. But the broker pays the trader if the position closes in a profit.
CFDs allow for rapid transaction times, which has advantages in a market rife with volatility.
6. Use Inverse Exchange-Traded Products
An inverse ETF is an exchange-traded fund (ETF) put together through different derivatives to profit from a decline in the value of an underlying benchmark. (An exchange-traded fund is one kind of pooled investment security that is much like a mutual fund.)
When you invest in inverse ETFs, you are holding numerous short positions. These inverse ETFs are tools investors use to bet that the market will decline. When it does, the inverse ETFs will rise by about the same percentage. (But broker fees and commissions are pulled from that growth.)
What Are Some Popular Cryptocurrencies To Short?
The three most popular types of cryptocurrencies to short are bitcoin (BTC), Ethereum, and Dogecoin. Many people like to short bitcoin, so we’ll start there.
Launched in 2009 by Satoshi Nakamoto, this is the first and most valuable type of cryptocurrency. It uses blockchain technology to record and organize transactions on a decentralized network.
(By “decentralized,” we mean that central authorities like governments or banks do not control it.)
A blockchain is like a database, but it organizes information in chunks or “blocks” that are connected or “chained” together. These ledgers cannot be modified to prevent nefarious actors from injecting fraud.
This is also a decentralized blockchain platform, the second most popular type of crypto behind bitcoin. But here’s the difference between the two: Bitcoin stores value as a currency, but the Ethereum network (launched in 2015) uses complex smart contracts and decentralized applications.
(A smart contract is a self-executing contract with the terms written directly into lines of code on a blockchain network. Decentralized applications are programs that run on a blockchain or peer-to-peer network instead of a single computer.)
Dogecoin launched in 2013 with a bit of humor in mind. With a dog on it, this was intended as a “memecoin” without much value. But in 2021, it skyrocketed to one of the top 10 currencies. While bitcoin was designed to be scarce, dogecoin (pronounced “dohj coin”) was created to be plentiful.
How did it become popular? People became so fond of it that the value began to rise, given the supply and demand market laws.
Funny, as it was started as a joke by software developers Billy Marcus and Jackson Palmer. And guess what? They connected over Reddit and had never met in real life.
What Are the Best Shorting Strategies in Crypto?
The best strategies we provided include margin trading, futures markets, binary options trading, prediction markets, and CFDs.
Again, we urge you to contact us before attempting any of the strategies we shared above. Too many people just want to go off and short-sell bitcoin without having a well-rounded understanding of how it all works or a solid strategy to execute. And that leaves them vulnerable.
What Are the Advantages of Shorting Crypto?
There are several benefits to shorting crypto. First, you can earn quite quickly if your investment strategy is well thought-out and executed correctly.
You also don’t have to put up a lot of capital. In other words, you don’t have to pay a hefty sum of your assets to get started. And finally, numerous platforms allow for margin trading. Trading with a margin account allows you to “shop around” and see where you think you have the best chance of success.
What Risks Are Involved With Shorting Crypto?
Shorting crypto is tantamount to gambling. You are betting that assets are going to fall in value. But that might not happen. The value could climb, which would result in a loss for you.
Remember, this is a market that is full of volatility. Values go skyward or sink like stones very quickly. And there’s no government or banks to regulate it all. That means you could lose quite a bit — very fast.
Additionally, aside from the price drops and short-term volatility involved in trading crypto, you should consider industry-wide factors that contribute to the overall risk of digital assets.
While the crypto and blockchain technologies give crypto more potential security than fiat currencies like the USD, the lack of regulation has led to a preponderance of high-profile scams (for instance, the FTX fiasco).
Make sure you research before getting into any trading strategy; guarantee your chosen lender or brokerage is sound and that the current market price of Bitcoin (BTC), Ether (ETH), or whatever your chosen crypto is likely to move the way you’re betting on.
The Bottom Line
As we said, short-selling crypto is essentially gambling. You can win big — many people do, which makes it enticing. Enough traders earn enough from shorting that the trend continues to be popular. But, just like Vegas, there is also tremendous risk.
While many people have lined their pockets, others have been stripped of wealth. With a volatile market like crypto, you never truly know which way the wind will blow. So, if you’re going to explore short, you need to make sure to do it with strategy and a plan in place:
If things go belly-up, where does that leave you? Make sure you’re prepared for all scenarios. Don’t just decide you want to short bitcoin and give it a whirl without much thought and planning.
We are here for beginners. It doesn’t matter if you’re trying CFDs or margin trading to short-sell bitcoin or whatever other currency; always go in with both eyes open. We’d love to help you prepare. Our whole mission is to help you succeed in the world of cryptocurrency trading.
Let us share a little more about ourselves. Pluto is an investing app that helps you automate investing in stocks and crypto-currencies by building a portfolio of strategies or rules for when to buy and sell.
With us, you can quickly build a portfolio of strategies to watch your investments and make better decisions with your own rules like “if bitcoin (BTC) dips below $20k, then buy.”
If you enjoyed this blog entry, please be sure to give our full blog a look, as we cover a wide variety of topics that can arm you with the knowledge to grow as a crypto investor.