How to short crypto?
Shorting cryptocurrency is a high-risk, advanced investing strategy. Here's how it works
When most people think about investing, they picture making money when the price of an asset goes up and losing money when it goes down.
Shorting, which is a more advanced method, is another way to make money. You bet against an asset because you think its price will go down in the future.
Can you short crypto?
Most people think of shorting on the stock market, but you can also short Bitcoin and other cryptocurrencies, many of which can be very volatile and have the potential for big gains or losses in a short amount of time. When you short cryptocurrency, you use the same steps as when you short stocks or other assets.
When you "short" something, you bet that its price will go down and use different derivatives and products on the market to put yourself in a position to profit from that drop.
"You basically borrow the asset from someone and then sell it," says Peter Eberle, president, and chief investment officer of Castle Funds, an investment firm in California. "Then, at some point in the future, you buy it back and give back the assets you borrowed. In traditional trading, the goal is to buy low and sell high. In shorting, the goal is to sell high and buy back low."
But it's important to know that shorting any asset, including crypto, is an advanced trading strategy that could easily go wrong. Shorting is a way to make money quickly, but you need to know a lot about the markets and derivatives.
Quick Tip: Experts say that if you want to trade or invest in crypto, you should use a crypto exchange, preferably one of the bigger ones. They tend to be safer, more reliable and have more traders and investors, which gives the market more liquidity.
How to short crypto
Shorting crypto can be done in a few different ways, such as by buying options or futures contracts, trading on margin, or using a contract for difference. Here's some more information about each method.
Buy crypto on margin
When you buy on margin, you get the money from a brokerage or exchange. Say you have $100 in your account and want to buy $1,000 worth of Bitcoin. The other $900 is "on margin." You took it from the other person. This lets trader’s trade bigger amounts and make bigger profits, but it also makes the risks bigger.
You may or may not be able to trade crypto on margin, depending on the exchange or brokerage you use and whether or not it lets you. But keep in mind that you will usually have to pay interest because you are borrowing money, and again, you could lose more than you have in your account.
In practice, using margin to short crypto means borrowing money from your chosen exchange to buy a certain amount of cryptocurrency, waiting for its value to go up, selling it, and making a profit. Then, you "return" the money to the exchange, pay any interest fees, and you've made a profit trading with money you didn't even have.
Use a contract for difference
A more advanced way to short is to use a contract for difference (CFD). The contract pays the difference between an asset's opening and closing prices. Depending on where you stand, a higher price on the close date could make you money, and the same is true if you are selling. So, if you short crypto with a CFD, you are betting that the price of crypto will go down.
CFDs are derivatives, and there are no rules about them. In fact, it is against the law for small investors in the US to use them in markets that are regulated. But there are no rules for the crypto market, so crypto traders can use them. There may be costs, like commission fees, to think about as well.
Here's an example of how this could work: You think Bitcoin will lose value because it costs $10. You open a CFD position to show that, and you keep a close eye on the markets. Then Bitcoin's price goes up to $8, the contract ends, and you've made the right bet, so you win according to the terms of the contract.
Use futures or options
One more way to short crypto is to buy futures or options contracts. Investors can buy or sell an asset at a certain price by a certain date with both methods. Options give a buyer the chance, but not the obligation, to make a purchase. Futures, on the other hand, require that the agreed-upon trade happen before the contract ends.
Futures and options are not for beginners because they require advanced knowledge of derivatives. When you open a position in an option, you may also have to pay a fee, called a premium.
Mark Fidelman, founder of the DeFi marketing agency Smart Blocks and host of the Cryptonized podcast, says, "You'd do a put on the crypto." A put is basically a bet that the value of an underlying asset will go down, so it could be used to short a cryptocurrency.
"You'd really bet on it going down," Fidelman says. "You'd hope it goes down in the short term."
Here's what I mean: Say you think the price of Bitcoin will go down in one day. You have 10 BTC worth $100 and buy a put that gives you the right to sell the 10 BTC at $100 in one day. As you expected, the price of BTC drops to $6. You can let the contract expire or sell the BTC at the $100 price mark, which is $40 more than its market value.
Using these kinds of contracts, you can open positions to short different cryptocurrencies at different times and prices.
Important: Options trading is a complicated method. You can get into a lot of debt even if you don't fully understand what you're doing. Because of this, most experts say you shouldn't trade options unless you are very familiar with the terms and mechanics behind it.
Risks of shorting crypto
It's pretty clear that shorting crypto has risks. If you bet that the value of a cryptocurrency will go down and it goes up instead, you stand to lose. How much you could lose depends on the tools or methods you use to open a short position and how much you have at stake.
Consider this: if you use margin to buy $1,000 worth of Bitcoin and the price drops by 50% overnight, your investment is now only worth $500 and you owe the exchange $500 plus interest.
When you short a security, even a stock, you face the same risks. But crypto has even bigger risks because it is a very volatile market that isn't really regulated. Still, some experts say that shorting can be good for the financial markets.
Gabriella Kusz, CEO of the Global Digital Asset and Cryptocurrency Association, says that shorting can improve liquidity, make stock prices more efficient, reduce market bubbles, and even sometimes help stop market manipulations. But shorting may have a place in the market, but that doesn't mean it has to have a place in your plan for investing.
Important: Shorting is a very advanced way to trade. It can give traders the chance to make huge profits, but it can also cause them to lose huge amounts of money.
Where to short crypto
Depending on how you want to do it, you can short crypto on a number of exchanges or platforms. For example, users can buy Bitcoin futures contracts on large exchanges like Binance.
Eberle says that shorting crypto can sometimes be a complicated process that requires a lot of exchanges.
"You can short real Bitcoin by putting up collateral on platforms like AAVE or Compound. Then, you pay a variable interest rate to borrow WBTC, which is wrapped Bitcoin on the Ethereum network, and take it to a centralized exchange like FTX or Coinbase," he says. He also says that is a complicated method, but one that traders could use.
Keep in mind that many larger platforms, like Robinhood, won't let users trade crypto on margin. So, you might have to do some research to find a platform or exchange that works with the shorting strategies you want to use.
Shorting crypto could give you quick money, but it's a complicated strategy. Experts say that short selling is probably not a good idea for most people because crypto is a very volatile asset.
"I wouldn't short that cryptocurrency unless you know everything there is to know about it," says Fidelman. "This isn't a game for newbies."