Cryptocurrency markets are highly volatile, with prices constantly changing.
This volatility, along with regulatory actions, can lead to fear-driven crashes and retracements after rallies.
To profit from falling prices without owning the cryptocurrency, you can use short selling.
This article explains cryptocurrency shorting, its risks, and how to do it.
What Does Shorting Crypto Mean?
Shorting cryptocurrency involves selling it at a higher price, anticipating a future price drop.
You don’t own the crypto when shorting.
In contrast, going long means buying crypto, expecting its value to rise.
For example, you short 1 BTC at $30,000, expecting a drop.
You borrow and sell it at that price. If BTC falls to $25,000, you buy it back, earning $5,000 minus fees and interest paid to the broker.
Shorting is risky due to market volatility. Losses can be significant, unlike long positions where you retain your investment even if the price drops.
Marketplaces like Bybit facilitate cryptocurrency shorting, making it more accessible. Research and conviction are crucial before shorting.
Reasons for Short-Selling Crypto
Traders short cryptocurrency for various reasons, based on potential gains and their analysis.
Here are some motives for short-selling crypto.
Valuation
At times, a cryptocurrency may be overhyped or in a price bubble due to announcements or market narratives.
Traders notice this and short-sell it for profit. They wait for a retracement.
When shorting based on valuation, use fundamental analysis to assess intrinsic value against market price.
This guides your buy-back strategy for profit.
Also read: Is KRNL a Bitcoin Miner? Detailed Analysis
Volatility
Cryptocurrency’s volatility can be a concern for cautious investors, but it’s an opportunity for traders.
Prices can rise and fall rapidly, attracting risk-tolerant traders who seek substantial rewards.
Those with expertise can leverage this volatility. When a cryptocurrency sees significant price growth, traders often consider shorting it.
Hedging Risk
Cryptocurrency volatility allows for short selling but can harm long positions.
If you own Bitcoin and expect its price to drop, you can short it to protect your long position.
If your prediction is right, shorting profits can offset or exceed long losses.
Hedging strategies reduce losses in a bear market, enabling potential profit regardless of market direction.
What Are the Risks of Short-Selling Crypto?
Shorting cryptocurrency is definitely a way to make some extra money when the market is down or to hedge your portfolio, but you need to consider its risks, too.
Below are some notable downsides to shorting cryptocurrency.
Limitless Losses
Holding cryptocurrency poses the risk of it not reaching your desired price, but you retain your crypto.
Shorting cryptocurrency has unlimited potential losses beyond your initial investment.
If prices rise, you may need to borrow at higher prices to reduce average costs and offset losses.
Margin Interest
When short selling cryptocurrency, you don’t own it; you borrow it from a broker with ongoing interest charges.
If the price doesn’t drop as expected, you may hold it for a while, incurring interest costs that eat into profits.
If the price keeps rising and you cut your losses, you lose potential gains and pay significant interest for short selling.
How to Short Cryptocurrency
Before short-selling cryptocurrency, identify a trend as the market is highly volatile, influenced by factors like politics, hype culture, and notable figures such as Twitter key opinion leaders (KOLs).
To learn how to short sell a cryptocurrency, study trends like high-end company or billionaire interest.
Open a margin trading account, offered by most cryptocurrency brokers, but ensure you follow your country’s regulations.
Now that you understand cryptocurrency shorting, let’s explore various methods for shorting your chosen cryptocurrency.
Direct Short Selling
When learning how to short cryptocurrency, this is the first method most people come across. Simply put, you borrow crypto from an exchange at a specific price and sell it.
Then, you wait for the price to go down. When it does, you buy the cryptocurrency back and return the borrowed cryptocurrency to the exchange. In this way, you earn the difference between the two prices.
Futures Markets
Like all other assets, some cryptocurrencies also have futures markets, in which you agree to buy a security in a contract.
The contract specifies the price at which the security will be sold and the time when this will happen.
In buying a futures contract, you bet on the price of a security to rise. Doing this allows you to earn a profit on that security in the future.
When you sell the futures contract, it indicates that you expect the price to decline in an upcoming bear market.
If you want to short Bitcoin futures, you can do so with Bybit Derivatives.
Contracts for Difference
Contracts for Difference (CFDs) are a popular way to short cryptocurrency. Brokers allow you to bet on price decreases or increases without owning the asset.
You deposit a fraction of the margin account’s fund to secure your bet, and this deposit remains yours as collateral.
You only need to provide a portion of the total trade amount, which can amplify your return on investment if the cryptocurrency moves as predicted.
However, this method comes with significant risk if the price moves against your prediction, potentially leading to position liquidation due to insufficient collateral.
Cryptocurrency Put Options
Cryptocurrency put options allow you to short crypto without risking your investments.
These complex derivatives are useful in a bear market.
A put option grants the buyer the right (not obligation) to sell a cryptocurrency at a set price on a specified date.
For example, if you believe Bitcoin will drop in summer 2023, you can buy a Bitcoin put with a $20,000 strike price for three months.
If Bitcoin’s price falls below this on the specified date, you profit. If it stays high, you only lose the option premium you paid.
Prediction Markets
To learn cryptocurrency shorting with fellow investors, try prediction markets like traditional ones.
Predict a cryptocurrency’s decrease by a certain percentage, and someone must take your bet.
If it pans out, you profit. Notable options include Polymarket and Augur.
Tips on How to Short Cryptocurrency
Shorting cryptocurrency involves various factors, so choose your approach carefully to avoid losses.
Here are some helpful tips.
Use Technical Analysis
Technical analysis uses real-world data to predict cryptocurrency market behavior based on historical performance, including movement and volume.
It assumes that history repeats itself in trends and pricing, aiding future predictions.
Indicators like ADX, Bollinger Bands®, standard deviation, and RSI help analyze trends and potential for profit.
Statistical tools like Fibonacci ratios, TWAP, VWAP, and moving averages also assist.
Moving averages track a cryptocurrency’s price over a specific period, often the past 20 days.
Learning these concepts enhances investment decisions but may require some study, especially for beginners.
Keep Up to Date With the News
News, including politico-economic events, can impact cryptocurrency markets significantly. Government actions and regulations can cause flash crashes.
If you anticipate such events, consider shorting cryptocurrency, but ensure compliance with government guidelines to avoid trouble.
Short Cryptocurrency During Rallies
Can you short cryptocurrency during sudden rallies? Yes, it’s an opportune time.
Rallies lead to overbought assets fueled by FOMO.
Once the hype fades, the cryptocurrency often returns to its original value or drops, offering profit potential.
Use Fundamental Analysis
While some experts question cryptocurrency’s fundamentals due to its short market history, you can still use fundamental analysis (FA) for smarter investment decisions.
FA involves examining factors like market sentiment, news, trading, adoption, and transaction activity that influence supply and demand for the cryptocurrency.
It helps assess the intrinsic value of the cryptocurrency, considering both internal and external factors.
Cryptocurrency’s FA differs from traditional markets, typically using three distinct metrics.
On-Chain Metrics
You can find these metrics on blockchain data readily available on various websites, including data charts for different cryptocurrencies on platforms like Bybit during spot trading.
Transaction Count
Transaction count gauges network activity. You can analyze it using moving averages and specific time frames to track changes over time.
But be cautious, as a high transaction count may not necessarily reflect unique active addresses and could involve wash trading.
Transaction Value
Transaction value reflects the total funds transferred in a given period.
For example, if ten people transfer Bitcoin worth $40,000 each, the daily transaction value is $400,000.
This data shows the level of interest in a cryptocurrency through transaction activities.
Where to Short-Sell Cryptocurrency
To start shorting cryptocurrency, seek exchanges with high trading volume for liquidity. Consider platforms like Bybit.
On Bybit, select the BTC/USD trading pair, choose Isolated or Cross Margin, and transfer your collateral. Set up automatic borrowing and an auto-repay order. If the price drops, borrowed funds are repaid automatically; if it rises, you repay manually.
Conclusion
In short, shorting cryptocurrency involves selling at a high price, anticipating a drop or retracement.
Our guide clarifies shorting crypto and where to do it legally.
Interested in short-selling on Bybit? Sign up, complete account registration, and start your journey.