How to Short Cryptocurrency

How to short crypto

Cryptocurrency is a volatile market as the price of coins can change several times a day. The movement of any exchange takes place within retail orders which represents a market obligation. To “keep” a stable profit, it is necessary to open, close, and change orders correctly. The essence of profitable trading is pure – buy cheaply, sell expensively, and earn money on the profit. For this purpose, the following types of commercial operations are carried out at the stock exchanges: short and long.

Long vs Short Position in Investment Strategy

If an investor has long positions, it means that the investor has bought and owns those shares of stocks. By contrast, if the investor has short positions, it means that the investor owes those stocks to someone, but does not actually own them yet. Investors who sell short believe the price of the stock will decrease in value. If the price drops, you can buy the stock at the lower price and make a profit.

How Can You Short Cryptocurrency

How does shorting work? To open a short position means to borrow the cryptocurrency and sell it on the stock exchange at the current price. After a decrease in value, the trader buys the cryptocurrency at a lower price, repays the borrowed money, and makes a profit on the difference between the cost of buying and selling.

Example
For example, if you first sell Bitcoin at $7,000, and then after falling by a certain percentage, say, up to $ 6,500, buy it again, you can make a profit of $500, or about 7%

The loan is provided on the stock exchange by other market participants who receive remuneration in the form of interest income. It depends on the term of the mortgage at a fixed rate. Many popular cryptographic platforms, such as Bitfinex and Kraken provide margin trading services – borrowing capital at relatively high-interest rates to increase their leverage. This results in the entire process of lending cryptocurrency for shortening being automated and configured by default.

What Is Longing?

The long position opens intending to withdraw profits when the rate moves upwards: purchases are made at a low cost, waited on for market growth, and then sold at a rising price. The margin between buying and selling is the net profit of the stockbroker. When holding great deals, the trader has to risk a large volume of securities and take into account the amplitude of the market movement on long timeframes.

Why Longing or Shorting Cryptocurrencies?

If a trader is convinced that the price of a particular financial instrument will fall, he or she opens shorts. He borrows securities for sale from a broker and as soon as the asset’s exchange rate drops, it redeems them and repays the debt at a reduced value. The benefit of selling and buying is the trader’s income.

Have the securities reached the minimum price? It’s time to make it long. Assets on the stock exchange are purchased at a low price. Then the trader waits for the growth of quotations and sells the securities, thus earning income from the difference between buying and selling.

How To Long Cryptocurrencies?

Taking a long line on cryptocurrency is the most simple investment strategy. In this scenario, traders invest in the currency because its worth can increase over time. It entails trading coins, which ensures that you own the money and that the income is calculated by the market value of your cryptocurrencies. This is the traditional low-buy and high-selling approach to technology innovation.

How to Short Crypto?

Shorting crypto requires traders to have the skills and readiness for analytics and prediction. Professional traders know the psychology of newcomers to the industry, when they will sell currency, and play shorts. Experienced players wait for such moments and start the process of “compression”. Compression allows traders to get the maximum income from the created pressure on the market orders. To avoid losses, do not enter the market during the process of short positions, and instead look to make sales at the top of the rally.

Avoid working at the exchange at the moment of opening short positions in the first and last hour of the trading session. It is better to focus on the time zone of the exchange headquarters or the audience for which the site is intended – which are full of false movements by market players. This is dangerous because other traders are only losing their positions in those moments.

A Brief Theory of Short Trading

When using “short” positions in trading, one simple rule should not be forgotten, even if the value of the cryptocurrency has fallen by half as traders will not earn more than 50%, and if the price rises by a factor of two, the losses will be 100%. Traders need to exercise caution in such a “lowering game”, because the cryptocurrency market has surprised even the most experienced traders with the speed of changing trends.

Margin Trading

Numerous people start briefly offering Bitcoin by using a margin trading stage committed to cryptocurrencies. This is the most straightforward kind of short trading when traders borrow cash from a broker, make the exchange, trusting that the wager pays off. There are many different crypto margin trades available, so it can be difficult to know which are worthwhile. Here is the list of the best trades in 2022:

  • Binance
  • Bitmex
  • Etoro
  • PimeXBT
  • CEX IO
  • XENA

Contracts For Difference (CFDs)

A contract for differences (CFD) is a course of action made in financial subsidiaries exchanges, where the contrasts within the settlement between the open and closing exchange costs are cash-settled. There’s no conveyance of physical products or securities with CFDs. Contracts for differences is an advanced exchange procedure that’s utilized by experienced dealers and isn’t permitted within the United States.

Futures

In conventional money markets, derivatives are utilized as hypothesis objects and protection against misfortunes – known as support. One assortment of subsidiaries used for promotions is called futures. This may be a contract between two parties where one party agrees to pay the other a foreordained sum of cash for a primary resource at a particular point in time.

The Bitcoin futures’ contract is precisely what you’d anticipate supplanting money with Bitcoin. It could be a contract that empowers you to buy Bitcoin at a foreordained cost, at a particular point, within the future. In the instance that today’s Bitcoin cost is 8,000 USD per BTC and you anticipate it rising to $10,000 per BTC in four weeks, at that point entering a contract which permits you to purchase Bitcoin at $9,000 in four weeks is exceedingly attractive. Therefore Bitcoin futures are a worthwhile course within the developing crypto subordinates market.

Betting and Prediction Markets

Prediction Markets Business research is another way to consider bitcoin shortcuts. They have not been in the blockchain for a long time, but they can be an advantage for currencies, including bitcoin. Such markets allow participants to create an event based on the results. So, you might forecast that Bitcoin will decline by a certain percentage of margin, and if anyone takes you up on the bet, you will be able to profit. Predictable is an indicator of a bitcoin prediction market. There are several popular prediction markets online today: Bet Moose, Weathbet, Fairlay, etc.

What Makes a Good Short Strategy?

Shorting Bitcoin is exchanging against a long-term uptrend; the longer the slant remains, the less secure it becomes. One thing to keep in mind: the highest benefit potential of a brief is constrained to a Bitcoin cost of 0, while buyers have no restraints on their profits.

Bitcoin chart

Data provided by TradingView

The ancient exchange truism, “price takes the stairs up, but the lift down” remains prevalent in cryptocurrency.  Though bullish moves take time to construct and create, bearish moves tend to be moderately brief and sharp. Attempting to brief the best of a huge bull run is intense and traders often halt out numerous times as Bitcoin rises. On the off chance that innumerable dealers are additionally situated, a cost surge may result, as dreadful dealers compete to shut their shorts (i.e., they purchase back the Bitcoins they sold).

Analyzing the Advertise for Short Offer Opportunities

In addition to technical analysis, it’s important to understand the Bitcoin space. For reference, here are some situations that have influenced Bitcoin’s price:

Past occasions that have activated major sell-offs:

  • Failure of significant exchanges.
  • Hostile administrative activity of significant nations (e.g. “China bans Bitcoin” fake news, SEC clamps down on ICOs).
  • Well-known designers are stopping the Bitcoin advancement group (e.g. Mike Hearn, Gavin Andresen).
  • Heightened hard fork dangers (eg. Bitcoin forking into Bitcoin Cash).
  • Delays or difficulties in widely-desired overhauls (e.g. SegWit, Lightning Network)

Events anticipated to harm the price:

  • Any disagreeable difficult fork.
  • Breach of the cryptographic primitives utilized in Bitcoin.
  • Discovery of Bitcoin code exploits, which debilitate wallet security or arrange operations.
  • Hostile activities against Bitcoin by the governments.
  • Movement within to begin with a million or so bitcoins mined by Satoshi Nakomoto.

Events which have had a small effect on cost include:

  • The disappointment of darknet markets, eg. Silk Street or Alpha Bay.
  • Claims of having deanonymized the character of Satoshi Nakamoto (e.g., Dorian Nakomoto or Craig Wright).
  • Hostile proclamations from writers, financial analysts, lawmakers, financiers, etc.

Shorting Bitcoin as a Part of a Trading Strategy

Top techniques to arrange shorting to be part of your trading strategy:

1. Tax Management

Taking short positions can potentially diminish tax bills by making a difference in overseeing capital gains. Amid bull markets, finding capital misfortunes to adjust capital can be a challenge. Shorting can serve to cancel out taxable pick up in such a showcase, which is especially valuable within the case of short-term capital gains (these are saddled at a better rate than long-term benefits).

2. Diversification

Through long and short positions on diverse (but similar) securities, fund diversity can significantly reduce risk. Various cryptocurrencies sometimes run in parallel. Long on Bitcoin and short on Ethereum will theoretically secure a trader’s investments against specific market forces that affect the entire crypto-ecosystem.

3. Choosing any Direction

Shorting allows traders to continue trading, regardless if they believe that the market is up or down. If a trader becomes persuaded that rates should fall rather than rise, the trader will potentially increase their income by shorting Bitcoin – as opposed to a hold approach.

How to Short Altcoins

A short position on Altcoin implies a belief that the Altcoin price will decline. Short positions operate first by selling the base asset (Altcoin in this situation), and then repurchasing. The markets immediately do this for us.

How to Short Ethereum?

ETH sometimes collaborates with other cryptocurrencies in currency pairs – not only national currencies like dollars or euros. A dealer that thinks ETH falls in value compared with Bitcoin can only buy Bitcoin and swap it for ETH (BTC / ETH) after the value has dropped. While this is not technically short, gains from a falling price in ETH can be allowed.

How to Short Litecoin?

If a trader already keeps Litecoin, they could pass the sum of LTC to the exchange for CBP, and sell the amount (0.3% charge) or set a purchase cap and pay an exchange fee of 0%. Traders should purchase orders for the same quantity at the lower price point.

Example

For example, if you offer 10 LTCs for $25.00/LTC, the earnings will be = $250 -$ 0. 75= $249.25 (taking charge= 0.30%* $250= $0.75).

FAQ

What are The Risks of Shorting Bitcoin (BTC)?

It depends on the scale of the stake. We encourage traders to consider using a trusted source to take the other side and write it up as a prop deal, even with small amounts (for example, $10).

How to Sell Short?

In short sales, the place will be provided by investing shares of equity or another commodity, which the lender expects to decrease in value by the defined expiry date. The lender instead markets these shares to investors who are prepared to pay the market price. The dealer hopes that the price will continue to fall before the lent securities are repaid, and they can then purchase at lower costs. There is technically no chance of losing in a short sale, as the price of any commodity will grow to infinity.

Why Could Short Selling BTC Be Bad?

There are at least two scenarios where shorting does not generate the expected profit:

  • The price does not drop at all. This is the most unfortunate scenario, which indicates that the trader has poorly predicted the development of the situation and incorrectly defined the current trend of the cryptocurrency. The price has not fallen, but it has remained at ten bitcoins, which should be returned with interest.
  • The price falls, but less than planned. For example, the bitcoin has fallen not to $6,500, but to $6,800 (which is also a very significant figure) and is not going to fall again. The rate is entering the upward trend again, and if the trader wants to make at least something on the shorting, he will have to pull the deal right now. With such a difference in rates, his dirty profit will be $2,000. Of that, almost $1,700 will be spent on commissions. His net income will be $300. And if the rate drops to $6,800, the commission will cut off the profits from the shorting. He’ll just go down, paying off the loan debt.

How to Short on Kraken?

Kraken Logo

Here is your entry for Kraken trading:

  • Select sell order
  • Select limit order
  • Select 2x leverage (necessary to go short)
  • Check current price
  • Select the number of shares (3 for this example)
  • Set sell price (this is to ensure the order is filled)
  • Review your order
  • Double-check it again
  • Confirm

Exit:

  • Select Buy order
  • Select Limit order
  • Select 2x Leverage (on Kraken setting any leverage will exit a margin trade regardless of the value)
  • Select the number of shares (3 again)
  • Set Buy Price
  • Review Your Order
  • Double-check it again
  • Confirm

How to Short on Poloniex?

Poloniex

On the exchange Poloniex, three separate accounts are created for each trader – exchange, margin, and lending. The exchange balance contains the funds that you use, for normal trading, in the Exchange section (tab). On the margin balance, there are funds intended for servicing borrowed money. The lending balance contains funds that you can lend to other players in order to get your profit from the turnover.

Is it Possible to Start Shorting Crypto on Binance?

Binance

The Binance Exchange provides this opportunity. Short is a tool used to open a deal to lower the rate. You can short manually or use a bot.

How it works:

  • You sell coins
  • We place a buy order
  • We put up a safety order to sell. If they work, we update the buy order and place new safety orders if necessary
  • After the buy, we cancel the safety orders

With 3commas, this is an easy way to trade without tracking the market 24/7.

How to Short on Bitfinex?

Bitfinex

Fill your Trade bag with cash. This is used to back up the loan (and are removed in the event of a loss). It deals only with BTC / LTC.

When you believe it has been identified, enter a sale number and place your order on either the sector or place a restricted order at a fixed price. It initiates a “loan”, and you immediately borrow BTC/ LTC and join your position in the process.

How to Short on Bittrex?

Bittrex

At Bittrex exchange, a trader can borrow crypt currency from another user or from the exchange itself. The lender receives interest for borrowing its assets, and the borrower may use the funds at their own discretion. When shorting, the borrower buys crypt currency that will fall in crypto profit value.

How to short on BitMEX?

Bitmex

Bitmex, your last real crypto-shortening alternative, lives in a gray area. Theoretically, U.S. citizens can’t use Bitmex, but many people use the VPN anyway. Bitmex sells highly leveraged quick BTC contracts. You just choose the type of contract and power, finance it, and strike it.

How Do I Get Started?

It is not recommended for beginners to engage in shorting. As a last resort, they may try to short “calm” coins with a more predictable rate. The scheme of shortening for beginners looks like this:

  • Choose the coin known in the market (newly baked cryptocurrencies will not work, because the trader will not have a base to study their market dynamics).
  • Analyze how the value of the coin has changed, what factors have been associated with periods of deep correction, and the sharp decline in the price (i.e., to conduct a fundamental analysis of the cryptocurrency).
  • Wait for the price to drop caused by the factors that worked before.
  • Using margin trading, buy the cryptocurrency before its price goes down (for this purpose, you need to monitor market news of the crypt currency, watch the market and analyze the nature of price dynamics of the crypt currency).
  • Sell coins after a sharp price jump.

With the right approach, this strategy makes a profit, and helps traders understand the market functions and formation of the cryptocurrency price. When this level is taken, traders can move on to shorting.

Bottom Line

Although considered an effective strategy for making money on cryptocurrency, the shorting game is riskier than investing in the long term or via averaging. According to experienced traders, under favorable conditions, the profit from shorting is 7-10% of the amount invested. At the same time, not all of the investments are made on their own, and mostly through borrowed funds – significantly reducing the degree of the initial investment problem.

However, the profit gained depends largely on the amount available to the trader, and if they can borrow 10 BTC, they have a chance to earn significant amounts. If the trader has only 1 BTC at their disposal, they can’t predict serious profit.It is advised that only experienced traders should shorten bitcoin – especially when working with large amounts. If traders are confident in correctly analyzing the market dynamics of the cryptocurrency, they should enter the market on the strongly pronounced downtrend, so that the difference in rates allow for earning 7-10% on the shorting.

If traders want to minimize their risks and gain as much profit as possible, we recommend joining 3commas, and gain full use of our auto trading bots and tools. We are happy to provide professional digital help with crypto trading, both for beginners and experienced traders. Our bot and tools for crypto traders help grow profits, minimize the risks, and limit losses across multiple exchanges involved when making money with cryptocurrency.

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