Crypto is highly volatile. In 2021, Bitcoin ranged from $29,000 to $67,500, and smaller coins experienced even more significant fluctuations.
For instance, Solana went from $1.8 to $259, then crashed to $90 by early 2022.
Some traders aim to profit from rising crypto values, while a subset known as short sellers makes money when prices fall.
This strategy, featured in “The Big Short,” involves betting on market crashes for profit.
Hindenburg Research is a notable modern example, impacting stock prices by exposing alleged fraud.
Understanding their methods can help you implement similar strategies to short crypto.
How does shorting work?
To short cryptocurrency, you typically borrow and sell it immediately, hoping to buy it back later at a lower price.
This strategy involves taking a loan denominated in the crypto itself.
For example, if you short 1 Bitcoin at $10,000 with a 10% annual interest rate, you sell it for $10,000, wait a year, and if the price drops to $5,000, you buy it back, repay the loan, and keep the profit.
This leveraged trading, or margin trading, allows borrowing more money than you have, with some platforms offering up to a hundred times the initial capital.
Professional qualifications aren’t always required for this type of trading.
Also read: How To Stake On Crypto.com
How to margin trade on a crypto exchange
When short selling on Binance, interest is calculated hourly, and loans can be taken out for up to 180 days.
For instance, if Bitcoin is $10,000, you’ll need to collateralize with $10,000 in a stablecoin, borrow Bitcoins, and sell them.
If the price drops, repaying the loan with cheaper Bitcoin can yield a profit.
For example, borrowing two Bitcoins at $10,000 each, selling for $20,000, and repaying at $6,000 could result in a 60% profit, excluding fees and interest.
This short trade strategy applies to various cryptocurrencies.
Short trading with margin accounts: the risks
Short trading on margin can backfire if the crypto’s price rises, leading to increased interest payments upon loan repayment.
To manage risks, Binance recommends using an “OCO” (one cancels the other) order.
This cancels the loan if Bitcoin’s price rises by a specified amount, limiting losses to a small amount.
Failure to repay the loan or meet margin requirements could result in liquidation, where the exchange cancels the loan and seizes owed funds.
Is short trading crypto on margin legal in Canada?
Yes, trading short positions of crypto is legal in Canada.
However, several exchanges that are popular among margin traders do not operate in Canada.
Futures and options markets
Shorting crypto isn’t limited to margin trading; futures and options contracts provide alternative methods.
Futures allow you to agree on a future Bitcoin price for buying or selling, while options grant the right to refrain from buying or selling when the contract matures.
One approach is buying Bitcoin at a lower future price and selling it when the market improves.
Alternatively, using put options allows selling at the contract’s expiration, managing risk if Bitcoin’s price rises.
Derivatives trading, like margin trading, is regulated, especially in Canada.
Deribit and the Chicago Mercantile Exchange are major players in Bitcoin options, with Deribit having $6 billion in outstanding contracts.
Is shorting crypto safe?
Futures and options trading, especially with leverage and in the realm of cryptocurrencies, is complex and risky.
Robinhood faced criticism for simplifying access to advanced derivatives usually reserved for experienced traders.
Shorting crypto involves significant risk and debt, and market movements can lead to position liquidation.
Platforms like Binance require a test for access to complex derivatives, but online availability of test answers means few barriers exist to prevent uninformed trading.
Adhering to common investment advice is crucial: only trade within your means and avoid products you don’t comprehend.
FAQs
Can you short crypto?
Yes, you can short crypto by borrowing and selling cryptocurrencies like Bitcoin, Ethereum, and XRP. Profits are made if you can buy them back at a lower price.
Why is short trading riskier?
Short trading is riskier than going “long” because it involves borrowing to trade, and losses can be infinite if the market moves against you.
How do you short Bitcoin?
To short Bitcoin, borrow cryptocurrency, sell it for a stable asset, and then buy back the crypto at a lower price if it falls. Margin trading is often used to maximize profits, but it comes with significant risks.