If you’ve seen the movie The Big Short, then you probably already understand the concept of shorting. A handful of people made a lot of money betting on financial losses. Much like what happened in the movie, shorting crypto is an investment strategy that involves betting on the decline of the price of crypto. In this article, ENON will walk you through several popular methods you can employ right now to make short crypto trading part of your investment strategy and how to short crypto.
What is Shorting Crypto?
Before we discuss short term crypto trading, let’s take a look at the most basic stock market trading strategy. We’re talking about “Buy low, sell high”. Buy a stock at a low price…wait for it to rise…and then sell it. You’ve made a profit.
That’s the long game. Shorting is the opposite. With shorting, you’re betting that the price will drop and that you’ll subsequently profit from those losses.
Shorting Crypto Example
Profiting from losses seems strange — and maybe a bit impossible. But it’s not. And it all has to do with borrowing instead of buying. Let’s look at an example.
You borrow one Bitcoin and short sell it for $25,000.
Eventually, the price of Bitcoin drops to $22,000.
You buy Bitcoin for $22,000 and then send back the Bitcoin that you borrowed.
You now have a profit of $3,000. Congrats! Remember, you borrowed that first Bitcoin in Step 1. You also sold it, but when the price dropped, you bought it back and were able to return it to the lender.
How to Short Crypto
Margin Trading
When you’re first figuring out how to short crypto, consider Margin Trading. With this short crypto trading strategy, you have the option to take the long position or the short position:
With the long position, you’re betting that the price will go up
With the short position, you’re betting that the price will go down
In both scenarios, you’re borrowing crypto at its current price with the goal of repurchasing it at a later date. With a short cryptocurrency strategy, your goal is to repurchase it when it drops, not when it rises.
Futures Trading
Now that you know how to short Bitcoin using Margin Trading, it’s time to explore Futures Trading. Much like a lot of other investment assets, some cryptocurrencies have Futures markets. Futures Trading involves entering into a contract where you agree to buy something at a specific price and on a specific date and time.
Typically, when you buy a Futures contract, you’re betting that the price will rise so that you can earn a profit in the future when you expect the price to drop.
There are a number of Futures Markets that will let you engage in short selling crypto, so it’s worth looking into. However, Futures Trading typically comes with a high amount of risk.
Options Trading
Options are a lot like Futures, but rather than having the obligation to buy or sell something at a specific price during a specific window of time, those engaged in Options have the “option” to do so. In a nutshell, you can , but you don’t have to.
Here’s an example. If you think the price of Bitcoin will fall at the end of the year, you can purchase a Bitcoin “put” for 3 months with a specific strike price. If Bitcoin drops below that, you’ll earn a trading profit. But if the price stays high, you won’t lose anything (except for the fee you paid to hold the option).
Prediction Markets
You don’t have to be psychic to know how to short BTC. But understanding Prediction Markets can certainly help. In this type of market, you get to predict the specific percentage (or margin) that a specific crypto will decrease by. If someone wants to take you up on that bet, you’re good to go. Then if the price you predicted comes to fruition, you’ll earn a profit.
CFDs
CFD stands for Contract for Differences. It’s an investment strategy that can earn you profit based on the difference between the open and close prices. You can think of CFDs as similar to Futures, except that instead of having predetermined settlement dates, CFDs are more flexible.
And in some crypto CFD markets, you can play to predict the crypto’s performance relative to either a fiat currency or another crypto.
If you’re just understanding where to short crypto, CFDs might not be the easiest to understand, but it’s definitely an interesting place to play in.
Leveraged Tokens
If you can handle more risk (and potentially more rewards), consider Leveraged Tokens when building your short cryptocurrency strategy. When you get a Leveraged Token (of the short variety), you’re betting that the price of crypto will go down.
With Leveraged Tokens, you get to take a leveraged position in a particular crypto, which means that your earnings or losses are multiplied.
For example, if you find a 3x Long Crypto Token, the profits of an investment will be tripled. That means if the value of the crypto increases by 1%, the value of the Token increases by 3%. And for you short crypto traders out there, it works the same way if the crypto decreases in price.
While Leveraged Tokens seem simple, they can be extremely volatile. Always keep that in mind.
Is Shorting Bitcoin Risky?
Like any investment strategy, shorting crypto comes with risks. Crypto is generally an extremely volatile asset. We’ve seen insane swings in both directions. Shorting crypto might seem like a decent strategy to make money, but it can also lead to big losses. Always talk to an investment adviser before jumping into any market.
Conclusion
Now that you know how to short BTC and other cryptocurrencies, consider what your ultimate goals are — and what your investment risk tolerance looks like. While there were some major financial winners in The Big Short, the number of financial losers is overwhelming.
What is shorting in crypto? Crypto shorting is a strategy that involves betting that the price of cryptocurrency will fall, and then profiting from those losses.
Can you short crypto? Yes, you can short cryptocurrency using a variety of methods. These include Futures Trading, Margin Trading, Prediction Markets, Options Trading, CFDs, and more.
What are the best ways to short crypto? The best methods for shorting cryptocurrency depends on your risk comfort level. Always talk to a professional investment adviser before incorporating crypto shorting into your investment strategy
