You may be aware that traders make billions shorting stocks, but you might be wondering whether shorting crypto is also possible. Keep reading to learn how to short Bitcoin quickly and where to short cryptos such as Ethereum, Cardano, and Dogecoin.
In short selling, also called shorting, you bet that the value of an asset such as a stock or crypto is going to drop. If done correctly, short selling can make you huge profits in a down market when other investors are hurting. The short-selling strategy works particularly well with volatile assets — crypto definitely fits the bill.
What's the difference between shorting crypto vs. a long position?
If you’re investing in Bitcoin, Ethereum, or other crypto on hopes that its price will rise in the future, you’re said to have a long position. Most investors in stocks and crypto have long positions, meaning they’re willing to wait even years to see the value of their investments appreciate.
If you’re betting that Bitcoin is going to lose its value, you’re said to have a short position. Many crypto skeptics are short on the sector. You can go short on crypto for as brief as a minute or as long as months.
At its peak in November 2021, Bitcoin's price came close to $70,000. In August 2022, the flagship crypto fell to about $20,000. Traders who saw the dip coming shorted the crypto and made a killing.
As with stocks, crypto shorting is based on borrowing principle. Say you borrowed Bitcoin when it was worth $70,000 and immediately sold it for the same amount. When the price drops to $20,000, you buy it back and return to the lender. You just made a $50,000 profit in that trade ($70,000 you received from the sale minus $20,000 to repurchase the crypto to repay the loan). If you had 10 Bitcoin involved in that trade, your profit would be a whopping $500,000. That would be a profitable trade at a time when investors who are long the crypto have seen their portfolio shrink sharply.
How does crypto shorting work?
Many traders short cryptocurrencies with the help of margin accounts. A margin account lets you borrow funds for your trades. Therefore, you would borrow Bitcoin or Ethereum when the price is high and sell it immediately. You would then wait for the price to decline and repurchase the crypto to repay the loan.
Aside from margin trading, you can also short crypto through trading futures and options contracts. In this case, you would purchase contracts that predict a decline in the value of the underlying crypto.
You can also short crypto through CFD (contract of differences). In this strategy, you get paid the difference between the opening and closing prices. For shorting, you would purchase a CFD that predicts a drop in the value of the crypto you’re targeting. Another method to short crypto is through an inverted ETF. An inverse Bitcoin ETF would deliver a return of 10 percent if the crypto drops 10 percent.
Timing is important when shorting crypto.
Crypto exchanges Binance, Coinbase, Kraken, FTX, Bitfinex, and BitMEX have features that support shorting. If you’re looking to short crypto through CFD trades, you can go to eToro, Plus500, AvaTrade, or Pepperstone. For crypto shorting through inverse ETF, you can use the ProShares Short Bitcoin Strategy ETF (BITI). An alternative to this inverse fund is the 1x Short Bitcoin Token (HEDGE) crypto, which seeks to offer -1x the daily returns of Bitcoin.
There are numerous reasons to short crypto.
Investors engage in short selling for various reasons. A primary driver is to profit from market downturns. In many cases, shorting is done as a hedging strategy. The investor has both long and short positions. The long position pays when crypto prices are rising. The short position pays when prices are falling and may help offset losses in the long position in a down market. But things can go wrong and you could lose a fortune.