How to short cryptocurrencies

What is crypto shorting?

Crypto shorting or short-selling is a trading strategy used to make profits by borrowing cryptocurrencies from an online broker, selling them and buying them back when they’re expected to depreciate in value.

This means that if the market moves in your favour and the underlying crypto market depreciates, you can expect to make a profit from the price movement.

Why would you short crypto?

You'd short crypto if you expect the value of the cryptocurrency market to depreciate. Some of the reasons why you may want to short cryptos include:

• High profitability. The crypto market is highly volatile. The high-risk high-reward nature of the market is what attracts risk-averse traders who stand to make amplified profits if the trade moves in their direction and a magnified loss if it turns against them
• Access to margin trading. When choosing margin trading, also known as leveraged trading, an online broker will lend you the full value of the trade. All that’ll be required from you is a deposit, which’ll be a percentage of the trade value
• Hedge against your open positions. When holding two positions on the same crypto, you can use the short position to offset the losses made on the long position through hedging. There are a number of hedging strategies you can use to do this

How to short crypto

1. Research which crypto you want to short
2. Open a live account or practise on a demo account
3. Open a position to ‘sell’ the crypto you want to short
4. Choose your position size and manage your risk
5. Place your deal and monitor your trade

Shorting cryptos with CFDs

With us, you can short crypto like bitcoin, ether and litecoin using CFD trading. When shorting cryptos using leveraged products like CFDs, you’ll speculate on the rise and fall of the underlying crypto market.

Leverage will enable you to trade on the underlying cryptocurrency by paying an initial deposit that’s a fraction of its full market value. When trading with CFDs, you’ll speculate on the price movement of the crypto market and won’t take physical ownership of the underlying asset.

You should be careful when trading on leverage because as much as it’ll amplify your profits when the market moves in your favour, it’ll magnify your losses when it turns against you. Ensure you only trade amounts you’re comfortable losing and take precautionary measures to manage your risk.

Example of crypto short-selling

If, for example, a cryptocurrency or crypto stocks like Coinbase are trading at 11.1285 and you believe their market price will decrease. Then you might decide to open a short position on 160 CFDs worth $1 each.

Let’s say a couple of days later the buy price reaches 10.1345 then you decide to close your position. This will mean you’ve made a profit of $159.04 in profit ([11.1285 -–10.1345] x 160 x $1 CFDs = $159.04), excluding additional costs.

If the price of crypto rises, you’d make a loss. For example, if ether shares rose to a buy price of 13.1345, you'd have made a $320.96 loss instead ([11.1285 –13.1345] x 160 x $1 CFDs = – $320.96), excluding additional costs.

Long vs short position in crypto

There’s a difference between taking a long and short position on cryptos. You’ll go long when you expect that the cryptocurrency’s price will increase and go short when the opposite is true.

You’ll short a crypto when you expect its market price to depreciate. You can potentially make profits when shorting by selling before the crypto market decreases in value. Essentially, you’d sell the crypto at a higher price and buy it back at a lower amount.

The table below shows the differences between taking long and short positions when trading crypto:

Shorting cryptos summed up

• Crypto shorting is a trading strategy used to make profits by borrowing cryptocurrencies from an online broker, then selling them at a higher price and buying them back at a depreciated value
• There’s a difference between taking a long and short position on cryptos. You’ll go long when you expect the crypto’s price to increase and go short when the opposite is true
• With us, you can go short on cryptocurrencies and crypto stocks via CFD trading

Footnotes

¹ the balance, 2022