- What Is the Meaning of Shorting Crypto?
- Risks of Short-Selling Cryptos
- Limitless Losses
- Margin Interest
- How to Short Crypto?
- Direct Short Selling
- Margin Trading
- Futures Markets
- Contracts for Difference
- Crypto Put Options
- Binary Options
- Prediction Markets
- How-to Tips for Shorting Cryptos
- Use Technical Analysis
- Stay Current with the News
- Use Fundamental Analysis
- On-Chain Metrics
- Transaction Count
- Transaction Value
- The Bottom Line
How to Short Crypto? 2024 Full Guide
What Is the Meaning of Shorting Crypto?
In simple terms, shorting crypto is the practice of selling cryptos at a high price with the intention of repurchasing it at a lower price later, ideally in situations where the crypto asset is predicted to fall.
The approach is called short selling because the trader is “short” on the coins, i.e., doesn’t yet own the crypto from which the trader intends to profit. To help with understanding, you need to be familiar with crypto short and long positions. When going long, the trader purchases cryptos with the expectation that its market value will increase. As an example, the trader will buys a specific coin at $15 and expect its price to reach $18. Once that price is reached, the trader sells and reaps the profit.
By contrast, short selling is borrowing a crypto, selling it at the current market value, and then expecting the value to fall, at which time the trader buys a coin and profits, the difference between the selling and buying prices.
Shorting is an approach to making money from the decline in an asset's value. Traders, therefore, are able to opt for shorting when the expectation is that a coin’s market is about to decrease. Shorting cryptos is risky because markets are often unpredictable. While there is certainly the potential for gains, a market’s volatility means there is the likelihood of significant losses.
When a trader holds a long position, the crypto’s price may well drop, but rarely to zero. So, even though the trader didn’t make any money on that trade, he still has the original investment. When shorting, the price of a coin may rise indefinitely, increasing the losses; thus, it is advisable to be certain there is sufficient solid research before jumping in. If the trader is confident about the research and positive the price will fall, he then takes the calculated risk because it could result in significant profit.
Marketplaces, like Lendingblock and Tybit, are simplifying the ability of borrowers and lenders to find each other and take advantage of the soaring interest in crypto shorting. The increasing number of resources is making short-selling crypto much more accessible to traders.
Risks of Short-Selling Cryptos
Limitless Losses
Margin Interest
How to Short Crypto?
Direct Short Selling
Margin Trading
Futures Markets
Contracts for Difference
Crypto Put Options
Binary Options
Prediction Markets
Recommended Brokers
How-to Tips for Shorting Cryptos
As there are several factors that serve as the base for shorting cryptos, the trader must be certain he is taking the correct approach at the time. The worst situation is to short sell a crypto during a false retracement. Here are some tips to help make the proper decision.
Use Technical Analysis
Technical analysis (TA) is using real-world data to predict how the crypto market will perform in the future. This requires viewing past performance of the crypto in which you are interested, such as its volume and movement. Thus, if a trader wants to know how to short Ethereum, the trader will view its trading volume today compared to that of recent months.
TA is based somewhat on Dow Theory, which asserts that pricing in a market is dependent on everything from current and past demand and regulations to a trader’s knowledge of the crypto itself and the trader’s expectations and future demand for that crypto. TA’s root is that history will repeat itself relative to pricing and trends. All this information then is used to predict future market sentiment.
Furthermore, TA is based on the concept that any movement in the crypto market is not random, but rather is based on a trend – either long-term or short-term. Generally, if a currency has followed a trend, eventually it will follow the opposing trend.
The following are some indicators that are used in TA to assist with predicting price crashes and retracements:
• Average directional index (ADX) assists with determining the strength of the trend.
• Standard deviation is applied to the annual rate of return on investment and shows the historical validity of investments in a crypto.
• Bollinger Bands demonstrate whether the crypto’s price is low or high on a relative basis.
• Relative strength index (RSI) signifies momentum in TA. For any recent price change, this indicator determines the magnitude.
These indicators allow a trader to determine the profit opportunity with an investment. The trader also is able to use some statistical tools, such as time-weighted averages price (TWAP), Fibonacci ratios and extensions, moving averages (MA), and volume-weighted average price (VWAP).
When learning how to short a crypto, there is a need to understand MAs. Simply, MA refers to a crypto’s price over a certain period. The MA typically depends on the crypto’s trading price over the previous 20 days. It is possible to make predictions more accurate by connection of the moving averages.
All of these approaches are complex statistical concepts and require some learning. A novice trader who is still learning how to short cryptos may be cautious about jumping into complex economics. Remember that factoring in these indicators will allow making more intelligent investments.
Stay Current with the News
This is not just crypto news, because politico-economic events can propel a market in any direction. Indeed, it is possible for government regulations and crackdowns to lead to flash crashes in the crypto market.
Therefore, if you suspect that something along these lines is about to take place, capitalize on the situation by shorting cryptos in the bear market. At the same time, be alert to not going against any government guidelines in the process because that could lead you into significant trouble.
Use Fundamental Analysis
There are those who do not believe cryptos come with any fundamentals at all, given that their markets have only been around for such a short time. It is still possible, however, to use fundamental analysis (FA) to help the chances of making the right investment decisions. When using FA, you uncover the forces that drive supply and demand of cryptos in which you are interested. Examples of relevant variables are news, trading, market sentiment, adoption and transaction activity.
Using FA, the trader studies the intrinsic value of a crypto. Then the trader views both internal and external factors to decide if a crypto is overvalued or undervalued. Because cryptos’ FA is not the same as that of more traditional markets, three different metrics commonly are used:
On-Chain Metrics
These metrics may be observed by viewing the data on a blockchain. In fact, the trader does not have to do very much because there are Websites that already have generated this data. For example, data charges for various cryptos may be viewed when spot trading on Bybit.
Transaction Count
Transaction count also provides a reasonable idea of the activity occurring on a network. The trader is able to use moving averages, and even plot a specific time period, to determine how activity surrounding a crypto changes over time.
Use this metric with caution! The information comes with no guarantee, for example, as to whether a high transaction count is because of unique active addresses or the same people transferring funds among their different wallets.
Transaction Value
Transaction value shows the number of completed transactions in a certain time period. Thus, if 10 people transfer Ethereum in a single day, the transaction count would be 10. If each Ethereum were worth $1,000, the total transaction value for the day would be $10,000
The Bottom Line
Recommended Brokers
FAQ
Shorting crypto means borrowing an amount of digital currency from a broker and selling it at market value. Then, when the value of the crypto has fallen, the trader purchases it and returns the borrowed amount, plus interest, to the broker. The trader’s profit is the difference between the buy price and the sell price, less the interest.
Is shorting crypto halal? Shorting cryptos normally is considered Haram because it involves selling something that is borrowed. It may, however, be worth consulting your religious leader for guidance.
Several crypto platforms exist on which futures, margin and options contracts can be traded. Among the best known are Coinbase, Binance, Robinhood, Webull, Kraken, eToro, Interactive Brokers, Bitfinex, Cryptohopper and Kucoin.
Short selling is highly regulated in traditional financial institutions. Crypto is unregulated in many jurisdictions, however, such as the US, Australia, India, Canada, and Europe. Traders, therefore, need to be wary of cryptos being hyped on social media because this could be a deceptive pump-and-dump scheme. As well, note that trading cryptos with CFDs or other derivatives in the UK is no longer possible.
