Short Crypto: How to Profit from Falling Cryptocurrency Prices

Cryptocurrency markets are known for their extreme volatility. Well, this provides opportunities to profit from rising prices, but short selling also allows traders to capitalize on downward moves.

Shorting crypto involves borrowing digital assets, selling them, and aiming to repurchase them at lower prices. With the right strategies, short sellers are able to generate significant returns during cryptocurrency bear markets.

Two Way Trading Crypto – An Intro to Short Selling

Two-way trading in crypto refers to the ability to buy or sell a cryptocurrency, allowing investors to capitalize on both rising and falling markets. Unlike one-way trading where you can only benefit from the asset increasing in value, two-way trading lets you profit in either direction, provided you predict the market accurately.

Short selling, also known as going short or shorting, is a trading technique where you borrow an asset, sell it at the current market price, and aim to repurchase it later at a lower price. The goal is to profit from an anticipated decline in the asset’s market value.

The way to short crypto like Bitcoin or Ethereum, is by an access to a lending platform that allows you to borrow digital assets. You sell the borrowed crypto at the current market price, wait for the price to drop, then buy back the assets at the lower level to return what you borrowed. The difference between the sell price and repurchase price is your profit.

Here’s an illustration of the way to short Bitcoin:

• Bitcoin is trading at $10,000
• You borrow 1 BTC and sell it immediately at $10,000
• Bitcoin price drops to $8,000
• You buy back 1 BTC to repay your loan at $8,000
• You keep the $2,000 price difference as profit

Short selling enables traders to generate returns even as cryptocurrency markets decline. However, it comes with substantial risks, which we’ll explore later in this guide.

Why Short Crypto?

Here are some of the main motivations for shorting crypto assets:

• Profit from falling prices – Short sellers make money as crypto prices drop. Shorting provides an opportunity during bearish conditions.
• Hedge against losses – If you have a long position, short selling acts as a hedge against downturns. The short profits can offset declines in your long portfolio.
• Speculate on price declines – You may speculate that certain crypto assets are overvalued and anticipate price crashes. Shorting allows you to act on this outlook.
• Arbitrage opportunities – In some cases, shorting can be used to profit from brief market inefficiencies through arbitrage strategies.
• Avoid capital gains taxes – Short selling resets the cost basis when reacquiring coins. This can help avoid capital gains taxes that would otherwise apply.

In general, short selling crypto gives traders more flexibility and opportunities to generate returns in both bull and bear market environments. When used properly, it can be a valuable addition to a well-diversified crypto trading strategy.

Here is How to Short Cryptocurrency

If you want to short Bitcoin, Ethereum, or other cryptocurrencies, you need access to a platform that facilitates short positions. Here are the main methods for shorting crypto assets:

Cryptocurrency Margin Trading

Margin trading allows traders to borrow funds from an exchange or broker to open leveraged position and go long or short. The borrowed money serves as the capital for shorting crypto.

For example, if you open a 3x short position with $3,000 capital on Binance, you control $9,000 worth of borrowed crypto to short. Margin trading uses leverage to maximize short selling capabilities.

Find out everything you need to know about margin trading.

Crypto Futures Contracts

A futures contract enables traders to agree to sell an asset at a specified price on a future expiry date. Crypto futures allow short selling by agreeing to sell Bitcoin or Ethereum at a future date based on your market outlook.

When the futures contract expires, positions are settled in cash rather than the underlying crypto. Futures provide short exposure without directly borrowing digital assets.

Cryptocurrency Options

Options contracts give traders the right, but not the obligation, to buy or sell an asset at a set strike price before the expiration date.

Put options allow you to make a profit from falling crypto prices when bitcoin falls. You can buy put options on Bitcoin or Ethereum rather than shorting the actual assets directly.

Strategies to Short Bitcoin and other Cryptocurrencies

To succeed at shorting cryptocurrency, you need solid trading strategies. Here are some of the most common short selling approaches:

• Technical analysis – Identify bearish patterns, support breaks, and overbought signals using chart indicators like moving averages, relative strength, MACD, Bollinger Bands, etc. Time short entries based on negative technical signals.
• Risk management – Use stop losses to contain potential losses on short trades. Set a stop level where the short thesis would be invalidated if breached. Manage position sizing based on account risk tolerances.
• Hedging – Maintain long cryptocurrency holdings as a hedge against short portfolios. The longs can offset short losses if prices rebound unexpectedly. Hedging helps manage risks.
• Arbitrage – Profit from brief inefficiencies in crypto prices across different cryptocurrency exchanges and trading platforms. This advanced shorting technique requires detecting and acting on small price discrepancies rapidly.
• Speculative shorts – Open a short position in anticipation of major crypto selloffs. Time short entries for key events like exchange hacks, regulatory bans, technical breakdowns etc.

Proper short selling strategies in crypto require identifying advantageous entry and exit points for short trades while carefully managing risks.

The Risks of Shorting Crypto

While shorting cryptocurrencies can be highly profitable, it also comes with significant risks:

• Unlimited loss potential – Short positions can lead to unlimited losses if prices rise dramatically. Cryptocurrencies routinely see massive short squeezes and upside price surges.
• Interest costs – Borrowing crypto assets to short incurs interest expenses until the position is closed. These lending costs can eat into profits.
• Margin calls – On leveraged shorts, margin levels must be maintained to avoid forced liquidations. Margin calls can trigger big losses.
• Security risks – Borrowed crypto collateral introduces custodial risks. Lenders could suffer hacks, theft, or loss of the assets.
• Cryptocurrency volatility – The extreme swings in crypto markets makes shorting very risky. Sudden upside price spikes can wreck short sellers.
• Potential short squeezes – If short interest builds excessively, short squeezes can be triggered where prices spike higher, forcing shorts to cover and realize losses.

While short selling can be rewarding if timed and executed properly, cryptocurrency traders should understand these hazards. Appropriate precautions are necessary.

Short Selling Crypto vs Traditional Assets

Here are some key differences between shorting cryptocurrencies versus traditional assets like stocks or forex:

• Volatility – Crypto is far more volatile than most stocks or forex pairs. This makes shorting riskier.
• Market size – The smaller crypto market is more vulnerable to manipulation spikes and short squeezes.
• Trading costs – Borrowing crypto fees and interest rates are generally higher than shorting stock or forex.
• Regulation – Cryptocurrencies are largely unregulated. Rules prohibiting naked shorting or leverage limits present in stocks or forex may not apply.
• Market hours – Cryptocurrency markets trade 24/7 globally. This allows shorts to be affected by overnight or weekend gaps.
• Security risks – Shorting crypto introduces unique hazard of borrowed asset theft by crypto exchanges or lenders. Far less common in traditional asset shorting.

While the core short selling principles transfer over, cryptocurrency markets have unique properties to consider. The additional risks and costs should be incorporated into any crypto shorting strategy.

In summary, short selling enables traders to generate profits from the falling price of bitcoin, but requires thorough risk management. Used properly, shorting strategies allow profits during cryptocurrency bear markets.

Brokers for CFD Crypto Shorting

Contracts for difference (CFDs) allow crypto shorting without owning the actual assets. CFD brokers include:

• eToro – Social trading platform that supports crypto CFDs. Short Bitcoin, Ethereum and other cryptocurrencies with up to 2x leverage.
• Libertex – CFD broker that offers crypto shorts. Up to 2x leverage available for shorting Bitcoin and major altcoins.
• Avatrade – Provides CFD trading on crypto prices. Short Bitcoin, Ethereum, Litecoin, Ripple, EOS and more with maximum 2x leverage.

CFD short positions do not involve borrowing actual cryptocurrency. Traders simply speculate on crypto price movements and profits are settled in cash.

Crypto Exchanges to Short Sell On

Some of the top exchanges that offer crypto shorting and margin trading include:

• Bybit – Popular margin trading platform with up to 100x leverage. Supports BTC, ETH, XRP, EOS and other shorts.
• Binance – Leading crypto exchange that offers margin trading across many altcoins. Up to 125x leverage available.
• Bitget – Provides crypto margin trading with max 100x leverage. Shorts for BTC, ETH, DOGE and other cryptocurrencies.

These crypto exchanges allow traders to open leveraged long and short positions by borrowing funds from the platform. The leverage amplifies profits but also increases risk on margin trades.