Introduction – Shorting crypto
Create profit when prices are dropping, this is shorting!
If you believe that you can only profit from cryptocurrency while the market is rising, you may be mistaken. This indicates that you are not familiar with the idea of shorting. By shorting, you can profit when the market declines. In this guide, we show HOW to short crypto on KuCoin, eToro and Binance with a lot of examples!
Short selling is a high-risk trading method that involves betting on the future price of cryptocurrencies.
So, holding a short position can be a wonderful option if you think Bitcoin or any other cryptocurrency will crash in the near future.
But is it really that easy? Let’s learn how it functions and the math involved before you execute your first shorting trade in the cryptocurrency market.
What is this article about?
Here is the overview of the blog article:
- How does shorting crypto work? (technically)
- 5 ways to short crypto
- How to short crypto on crypto exchanges (KuCoin, eToro and Binance )
- Things you must consider after shorting crypto
How does shorting crypto work? (technically)
In short selling, an investor borrows crypto coins they expect to lose value, sells crypto at the current market price, and then buys them back at a lower price. The investor then returns the cryptocurrency to the original lender to complete the short sell crypto, pocket the difference in value between the buy and sell prices. (I know it’s rocket since… read it again and it will make “click”)
This example was about margin trading, continue reading below for more details about this trade.
The following image will illustrate margin trading and go short bitcoin:
5 Ways to short crypto
Futures contracts
An agreement between a buyer and a seller is called a futures contract.
In which the former commits to purchasing from the latter a predetermined quantity of shares or an index at a predetermined price and time in the future.
Example: futures contracts (short selling)
Suppose we want to short Bitcoin, so we short-sell our futures contracts of bitcoin. The concept is to sell something you don’t own (short selling) and then return it later when the price drops.
You make money if you can purchase it for a lower price of bitcoin later, but you lose money when there is a higher price.
Crypto CFDs (contract for differences)
In the world of finance, a contract for difference (CFD) is a common kind of derivative that allows you to speculate on the price of an asset, like on the price of bitcoin.
To be more clear, CFDs are an agreement between you and your broker, but you don’t own the underlying asset. So, you will buy and sell your cryptos in FIAT and don’t need to worry about blockchain technology.
They come with leverage, which allows investing a smaller amount of money but with a high risk of losing more than invested.
For instance, if you think that the price of Bitcoin will increase, you might place a “long” Bitcoin CFD trade, if the bitcoin’s price had increased by the time your trade was concluded, you would have made a profit, congrats!
Similar to this, you might enter a “short” Bitcoin CFD contract if you thought the price was going down. If the price had decreased when your trade was closed, you would have profited.
CFDs are similar to futures contracts but without a specific date.
Since there is little regulation in the CFD market, a broker’s legitimacy is founded on both its standing and capacity to support itself financially. The United States does not offer CFDs as a result, they are illegal in the USA.
Margin trading
Margin is the sum of money borrowed from a broker to pay for an investment, which is calculated as the difference between the investment’s entire value and the loan sum. Margin trading is the process of using borrowed money from a broker to trade a financial asset that serves as security for the broker’s loan.
Margin trading is “Borrowed money from a broker/exchange to buy assets”. The contra is the possibility of losing a lot of money. You better don’t get a Margin Call!
Prediction Markets like Augur, Gnosis, or Omen.eth
Prediction markets are free markets where certain outcomes can be anticipated using financial incentives. They are essentially exchange-traded markets designed specifically for trading event outcomes. Market pricing can reveal what the public believes the likelihood of an event to be.
5 Examples of Decentralized Prediction Markets
Binary Options (different ways to short)
There are also binary options for shorting Bitcoin. The call and put options are a well-known concept where you have to execute a put order using escrow or other services.
Overall, it is a short-term and limited-risk contract trading type. It has two possible outcomes. The first outcome, you make a profit that you have predefined. Or you lose the premium (like a commission) you paid to open the trade, but you cannot lose anything more.
Step-by-Step: How to short crypto on exchanges
Guide: How to buy futures on KuCoin exchange to short bitcoin
First, select “Derivatives trading” and then “Futures lite” (that’s an easy way of trading to begin with shorting crypto)
Then, make sure to select the cryptocurrency you want to short. We think bitcoin falls, therefore we are using bitcoin perp futures.
Next, select the order amount in USDT, your leverage, and click “short”. Afterward, you can select your Stop Loss and Take Profit, which you should set to minimize your risks!
Guide: How to margin trading on Kraken (short bitcoin)
Select the Pro Experience in Kraken and select the trading pair (be sure to select a margin trading pair).
For shorting crypto, you need to select the button “Sell” and insert your limit order and leverage.
Guide: How to buy put options on Binance (short bitcoin)
Things you must consider after shorting crypto
As with any strategy related to cryptocurrencies, shorting Bitcoin involves enormous risk. There are several aspects you should consider while shorting Bitcoin.
All the ways to short Bitcoin depend on derivatives. These derivatives are based on Bitcoin pricing; traders bet either on a long position or short position while using bitcoin and it the result in the account depends on where the price will go.
For example, Bitcoin futures mimic spot price changes, meaning they cannot be used as an effective hedge against an investment in actual Bitcoin. Similarly, options trading in Bitcoin can multiply losses due to the underlying cryptocurrency’s price volatility.
More crypto knowledge
Do you want more? You are in the right place, check here for more knowledge that level you up as a crypto investor:
- READ the content of the best crypto medium writer Max Perkmann (hot topics, very profound without exceeding 10 minutes of reading time)
- LISTEN to the top crypto podcasts in 2022 in order to don’t miss the next bull market!
- Secret tip: Did you wonder how to delete a crypto com account for FREE? (normally you need to pay)
- Interested in other investments like stocks or luxury watches? Continue here.
The article includes the personal opinion of the author. It should not be considered Financial or Legal Advice. All data and numbers have been sourced at the 2022–09-23. Changes may apply.
About the author
Patrick Gruber is homeless because
he made his dream of being a digital nomad real.
He started as a developer, ventured into Amazon FBA business, invested in the market, founded a Cardano Stake Pool, and started his blog in 2022.
His blog shares his insight into the LIMITLESS possibilities of life.
If you're looking to change your world and gain practical knowledge, you're in the right place. Keep reading to learn more.
