How to short crypto

The crypto market is highly volatile, which is why traders can make significant profits through its price fluctuations. However, the opposite can also happen, and people can lose money in huge price swings. 

To mitigate such losses, investors may consider shorting crypto, a trading strategy that involves making money when the cryptocurrency price falls. This article discusses how to short crypto and the different ways to do it.

What is shorting?

Shorting, also known as short selling, is a trading strategy where traders bet that the price of an asset will fall. It is the opposite of going long, where investors bet that the price of an asset will rise. 

Related article: How to control emotions in trading and protect your capital

When investors short an asset, they borrow the asset from a broker, sell it on the market, and then buy it back at a lower price. They then return the borrowed asset to the broker. After that, they keep the difference between the selling price and the buying price as profit. That’s how shorting works. 

How to short crypto?

Investors can short crypto in several ways. Two popular methods are futures contracts or contracts for difference (CFDs).  

These methods are commonly used worldwide, it doesn’t matter if people ask how to short crypto in US or Europe. It depends on the availability of brokers and exchanges for specific countries.

Shorting crypto through futures

Futures are financial contracts that allow investors to buy or sell an asset at a predetermined price and date. If, let’s say, investors ask how to short crypto on Kraken through futures, they can follow these steps:

1. Choose a cryptocurrency exchange that offers futures trading. Some popular exchanges include Binance, KuCoin, Huobi, Kraken, or BingX.
2. Create an account on the exchange and complete the necessary verification procedures.
3. Deposit funds into the account.
4. Select the cryptocurrency, the futures contract to short, and the leverage.
5. Enter the trade, then set the stop-loss and take-profit levels.
6. Wait for the results.

Shorting crypto through CFDs

CFDs are financial instruments that allow investors to speculate on the price movements of an asset without owning the asset. To short crypto through CFDs, investors can follow these steps:

1. Choose a broker that offers CFD crypto trading. Some popular exchanges include eToro, IC Markets, or Purple Trading.
2. Create an account at the broker and complete the necessary verification procedures.
3. Deposit funds into the account.
4. Select the cryptocurrency and the CFD contract to short.
5. Enter the trade, then set the stop-loss and take-profit levels.
6. Wait for the results.

Shorting crypto with leverage

Leverage in trading allows investors to open larger positions than their initial investment. For example, an investor with $1,000 can use leverage to open a position worth $100,000 if they choose to use a leverage of 1:100.

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If the position makes a profit, the investor keeps the profits, but if it makes a loss, the investor is liable for the entire loss. To short crypto with leverage, traders can set it up with each trade through futures. 

However, when trading CFDs, the leverage is set up for the entire account upfront. That means traders choose leverage when creating an account. Usually, traders shouldn’t try higher leverage than 1:100 to precede huge losses.

5 unpopular facts about shorting crypto

While shorting crypto may seem like a straightforward trading strategy, there are several unpopular facts that investors should be aware of before engaging in this activity. These include:

1. Shorting crypto is riskier than going long 

Shorting crypto involves betting against the market, which is inherently riskier than going long. If the market moves against the trader, the losses can be significant, especially when using leverage. This is because the crypto market rises in the long run, similar to the stock market. 

2. Shorting crypto is not a guaranteed way to make money

While shorting crypto can result in profits if the price falls, it is not a guaranteed way to make money. The crypto market is highly volatile, and price movements can be unpredictable. Don’t believe everything you see on Instagram or Tiktok. There are many scammers who only want to use investors’ naivety to profit. Make sure to look out for red flags. 

3. Shorting crypto can be expensive

Shorting crypto often involves paying interest on borrowed assets and fees to the exchange. These costs can add up and eat into the investor’s profits. For example, traders pay fees for holding trades through CFDs on a daily basis, depending on the size of the trade.

4. Shorting crypto is not for novices

Shorting crypto requires a sound trading strategy and a deep understanding of the market. Novice traders may be better off avoiding this strategy until they gain more experience. This is something not everyone will reveal, but it’s important for beginners to understand.

5. Shorting crypto can be emotionally challenging

Shorting crypto involves betting against a popular and rapidly growing market. As a result, investors may face emotional pressure, especially if their position goes against the market. It’s not all rainbow and sunshine. 

Conclusion

Shorting crypto might be a viable trading strategy for investors who want to make money when the cryptocurrency price falls. There are several ways to short crypto, including futures or CFDs. Each method has its advantages as well as disadvantages, and investors should choose the method that suits their risk tolerance and trading preferences.

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Most importantly, investors should be aware of the risks involved in shorting crypto. Cryptocurrencies are a highly volatile market, so the price movements can be very challenging. Shorting crypto with leverage can magnify the risks and result in significant losses if the position goes against the investor.