Shorting Cryptocurrency: A Quick Guide For Beginners
Cryptocurrency is a relatively new concept that most businesses don't understand. It's not really a currency and can't be used in the same way as traditional currency, but it's an investment opportunity. Short selling is available on many exchanges and can be used as a tool to make money off the crypto in your wallet. This is a guide on what short selling and how you can go about it.
Intro to Shorting
In the stock market, green is the new gold. Green means that an asset is gaining. To many people, green also means that they are making money on their investments. But is there a way to make money when the price of crypto is dropping? And how can I make money with cryptocurrencies even when I have none? There is a way to make money when you think an option will fall – shorting cryptocurrency.
What is shorting?
Short selling, or shorting in short, is an investment method used when you expect an asset's price to drop. The reason you are shorting is that you don't have the funds to buy the asset that you can then sell at a profit - you are short.
Anyone can short-sell crypto. Although not all investors subscribe to the strategy, people who buy and sell crypto can short their holdings directly. It sounds so simple. Sell off bitcoin at a favorable price, then buy back your satoshis when the price falls.
Naturally, if things don’t go as you had hoped and the price shoots up, you stand to lose the part of your crypto invested in the process.
Long and Short Positions
The trading world is full of intricacies but the fundamentals remain – buy when it's cheap, sell when it's highest, and make a profit. To earn a steady income, traders must be decisive when opening, closing, and changing an order.
Long and short orders are infinitely distinct. Going ‘long’ essentially means buying crypto with the expectation that its market value will rise. Opening a long position of a BTC/USDT pair means buying just when you think the time is ripe and selling when the BTC to USDT grows.
Opening a short position does not imply a short-term deal. When an investor goes 'short', they borrow crypto to sell at the current market price. When the value of the asset drops, the investor buys the asses at lower prices, repaying the crypto borrowed and making a profit of the difference.
How to Short Cryptocurrency?
The intention of shorting bitcoin, Ethereum, or any other cryptocurrency is not just to make money, but to use resources you don't have to grow your profits. Let's explore this genius.
Assuming you short-sell bitcoin when the price of 1 BTC is $1000. You borrow 5 bitcoins and now you own $5000. You are now short of 5 bitcoins. You are a seasoned trader and sometime in the future, your prediction falls through and the price of 1 bitcoin drops to $800.
You seize this chance and buy your bitcoins for $4000 and pay the loan you had borrowed. You look at your account and without initially having the resources to do so, you have made $1000. But first, you had to borrow.
Crypto loans are a direct result of automated lending contracts that see other market participants rewarded with interest on the capital provided for shorting purposes. Margin trades allow market participants to borrow funds from a broker to make a trade. So where’s the catch?
There is a leverage factor involved but that will be covered later. But even before that, what happens if the price were to go up? Bitcoin is notorious for sudden price changes over shorter periods. The token leaped from $4000 in April 2019 to $9000 in June 2019.
4 Shorting cryptocurrency methods
- Limiting your exposure
- Short-selling method
Limiting your Exposure
Shorting cryptocurrency is not an open field for beginners. Bitcoin is characterized for its volatility and predicting market prices requires a bit of skill even for the most seasoned day traders. But traders love a good mystery and often seek to reach where no one else has. While gains from short-selling can be great from every perspective, the losses can be unforgiving.
On one hand, the more the price of an asset were to drop, the more your profits would be. The highest profit you can make is when the price drops to zero. That way, you will have to pay nothing for the loan you took, keeping the rest as profit.
On the flip side, if you short-sold 5 bitcoins for $5000 when the price was $1000, you are in debt for the same amount per bitcoin borrowed. Bitcoin's price sometimes reflects a reaction to certain events making it highly volatile. If one of these events were to cause a rapid rise in price to $3000, the 5 tokens borrowed would have to be repaid at $15000.
Apart from miners and crypto exchanges, there are many market participants in the crypto market. If any of them find themselves in the same position, they would instinctively sell off their short positions to limit losses. This event is known as a "squeeze" in Wall Street vocabulary.
Discretion is commonplace for everyday traders. Professional cryptocurrency traders take advantage of high volatility to make profits on a weekly, daily, hourly, or by the minute. Crypto offers a more volatile option compared to traditional asset classes whose prices remain relatively stable over shorter periods. To most crypto traders, volatility is every day at the golf course.
See also: Cryptocurrency Grid Strategy
One common short-selling method is Contract for Differences (CFD) Trading. Many cryptocurrency trading platforms offer crypto trading pairs. Those seeking to profit from crypto they don’t own would be attracted to CFD trading. The contracts are exchanged without any transfer of the underlying asset. The settlement for the “difference” between the opening and closing exchange rates is the only conveyance of funds involved.
Short-selling often occurs in a margin account. Investors have to deposit part of their funds as a guarantee that they will be able to buy tokens at the intended price. These "initial deposits", say 50%, remain in the possession of the investor and are only held by the exchange as collateral.
Margin accounts allow exchange users to short-sell cryptocurrency. Another cryptocurrency strategy to consider when shorting Bitcoin in prediction markets. Fairly new to the crypto world, they can help traders short volatile cryptocurrencies.
This is where the leverage factor comes in. When trading CFDs, it would be a good idea to understand how leveraging multiplies your exposure. Leveraged shorting simply enables investors to borrow more from the exchange.
Perhaps, as a rule of thumb, the majority of the available cryptocurrencies should be treated as commodities. A curious example is ethereum, a cryptocurrency designed for use within the Ethereum network. The platform is unique for creating smart contracts within its blockchain network.
As commodities, the price of cryptocurrencies is influenced by global demand. In illustration, the price of oil is driven by global demand for oil products and reserves. The ethereum case is curious because demand is most likely to come from continued use of the Ethereum blockchain and its related applications.
See also: Buy Ethereum
If you have $2000 in bitcoin deposited in a decentralized exchange and you leverage on a 1:2 ratio, any direction of price movement is multiplied by 3. It also means that you can short-sell $4000 in BTC which is more than you have deposited.
You can think of leveraging as a magnifying glass. If the price of bitcoin were to drop by $500, your profits would increase by a factor of 2 to $1000. Leveraging magnifies both gains and losses. Naturally, if the price increased by $500, your losses would be amplified to $1000.
Exchanges know that you are leveraging using the money you don't have. If the price goes against your expectations, some exchanges would automatically close at a certain price rather than try to collect more from traders. Exchanges move in to protect traders since they stand to lose an infinite amount if the price keeps increasing.
Predicting price drops in a volatile market such as crypto is not a walk in the park. Tracking Bitcoin's cost by glancing at the charts, you will soon realize the truth of the old truism, "price takes the stairs up but the lift down." While bullish movements take years to grow and strengthen, bear movements appear to be mildly short and sharp.
See also: Best Crypto Payments Cards
In traditional securities exchanges, investors can enter into a contract that binds both parties to exchange an underlying asset at a preordained price in the future. Futures trading is commonplace in the money-related derivatives market.
Futures trading in the crypto world is a direct deductive of the synthetic tools employed in the derivatives market. The application of primal futures principles to the cryptocurrency world is still new.
In the basic application, on the off chance that the current bitcoin price of $5000 is expected to rise to $8000 at a particular time in the future, this presents an opportunity. One could choose to enter into a contract that binds the taker to sell 1 BTC at $7000 to you. Taking home an asset at a price lower than the market surely sounds interesting.
When a disruptive technology successfully disrupts markets taking the form of a financial asset, it is usually these assets that show the greatest value gains over time. Such disruption is embodied by the rapid rise of the Amazon stock from a mere $83 to today's price of $1900. Early investors in this stock might also appreciate the disruptive power of cryptocurrencies on financial markets.
How to short crypto on Binance?
As an example, suppose you're interested in shorting Bitcoin or another cryptocurrency on Binance. You may do this in a variety of ways.
The first choice is to short Bitcoin and other cryptocurrencies on Binance's Margin Trading platform. The procedure is straightforward, and all users need to do is:
- If you haven't already, open a margin account.
- Navigate to Binance Margin Trading.
- Navigate to the market pair of your choice, such as BTC/USDT or BTC/BUSD.
With Binance Margin Trading, you can borrow funds for leverage trading
How to short Bitcoin?
Sticking to margin trading on Binance, here's how can you short Bitcoin in less than a minute.
Here’s how you do it:
After opening your margin account, log in to your Binance account and go to the BTC/USD trading interface. Depending on your preference, you can choose between cross margin (3x) or isolated margin (10x). Clicking one of the two prompts you to open the corresponding margin account.
Secondly, transfer your collateral by clicking ‘Transfer’ and decide on the amount of USDT. Confirm to transfer this amount from your spot wallet to the margin trading account.
The next step is to initiate automatic borrowing. If, for example, 1 BTC = 5,000 USDT, you can borrow upto 15000 USDT. By clicking “Margin Buy BTC”, the user will receive 3 BTC on the 5000 USDT collateral and borrowed 10,000 USDT.
Lastly, make an auto-repay order. If the price of BTC rises to 6,000 USDT, sell your coins and the 10,000 USDT borrowed will be automatically repaid. If the price swings the other way, you will have to manually repay the amount borrowed.
See also: Best Blockchain Games
How to start shorting cryptocurrency?
Shorting Bitcoin can be more difficult at times than at others. Shorting Bitcoin against long-term uptrends, for example, can be challenging to say the least. Bitcoin's value steadily increases over time. On the other hand, this digital asset's market value will quickly plummet by thousands of dollars.
Today, it is easier than ever too short cryptocurrencies. The initial move is to identify a reputable trading platform that supports leveraged trading. These platforms are specialized in high-risk loan shorting.
Notably, you will be required to repay any loan you obtain, plus interest. If you borrow ten Bitcoin, you must repay them when the loan is due. These platforms enable users to make a deposit, or margin, to ensure that you keep your pledge.
Margin provisions serve as leverage or insurance for your trades. These holdings serve to protect your interest by ensuring that the shares are repaid at the agreed-upon future date. If your short position begins to deteriorate, your lender has the option, and most likely will, to call your margin in. Most sites would just need to give you a brief notice before doing so. As a result, it is important that you carefully read the fine print of your Bitcoin short agreement.
See also: XRP Short
How is Shorting Different than Margin Trading?
While margin trading is similar to shorting, there are some key differences. Shorting a cryptocurrency involves selling a cryptocurrency that you do not own. Margin trading is essentially borrowing money from your broker to buy a cryptocurrency. The key difference is that when you borrow money to buy a cryptocurrency, you need to pay interest on the borrowed money. With shorting, you just need to pay the broker a small fee for their service.
Crypto Exchanges That Allow Shorting
Binance is the largest cryptocurrency exchange in the world in terms of the trading volume. They recently added margin trading to their platform, which can be accessed via the Binance dashboard. The process is as outlined earlier.
BitMEX enables cryptocurrency margin trading and has garnered considerable respect in the crypto world within a relatively short period of time.
At the moment, BitMEX provides margin trading for six cryptocurrencies, the most well-known of which is Bitcoin. BitMEX's registration process is straightforward; all you need is an email address to get started, and you can also protect your funds using BitMEX's two-factor authentication. Although BitMex is not available to customers based in the United States, you can circumvent this restriction by using a VPN service.
Kraken is one of the biggest Bitcoin and altcoin exchanges in the United States, with its headquarters in San Francisco.
Additionally, it is the largest exchange in terms of EUR volume, allowing everyone to register using their email address and begin trading immediately after completing proper KYC verification.
Margin trading is also possible on Kraken, taking advantage of the various leverage options available for various pairs.
Bitfinex is one of the most well-known and established cryptocurrency trading platforms, having been in service since 2012 and catering to intermediate and advanced traders as well as institutions.
Bitfinex's peer-to-peer margin funding service enables users to margin trade, long or short, with up to 3.3x leverage on all 128 assets.
OKEx, established in 2014, is the world's second-largest cryptocurrency exchange by amount. However, access to the exchange is limited due to the exchange's strict usage guidelines.
Due to high market demand, OkEX increased its leverage option on BTC, ETH, EOS, and LTC, which can be exchanged against either BTC or USDT, from 3x to 5x.
Shorting bitcoin Reddit
The Reddit crypto community is quite helpful to new and established investors. Reddit hosts cryptocurrency communities in which several virtual investment clubs control a simulated portfolio based on value and development investing. Group pitches, debates, and votes determine portfolio holdings. These communities not only help beginner traders find their footing but expose on to different trading strategies.
While shorting Bitcoin can be an effective way to make money, it’s important to remember that it should be treated like a business opportunity and not a get-rich-quick scheme.