What is Shorting in Crypto? A Layman’s Guide

Shorting in Crypto

The crypto market is known for its volatility and risky behavior. The coins you anticipated to increase in value today may be worth nothing tomorrow. If you observe the market daily, you’d be well aware of how some coins experience severe fluctuations a couple of times during the day.

The volatile nature of crypto keeps many from entering the market to avoid possible losses. Yet, others have mastered strategies like shorting to turn anticipated losses into wins.

Shorting or short selling in trading is when the investor anticipates profit when a crypto asset decreases in value, for instance, Bitcoin or an altcoin. Albeit a risky strategy, experienced crypto traders prefer shorting because of the possibility of enormous profits.

If you’re a novice trader creeping up to the expert level, this guide will help you leverage shorting in uncertain market conditions.

What is crypto shorting?

The term “short” stems from the fact that you are short on funds for buying an asset that you want to profit off. Shorting is a common investment strategy for stock market trades. Essentially, through short selling, investors expect to make a profit when an asset decreases in value or its price drops.

Investors that don’t have the funds to finance a cryptocurrency purchase borrow the asset on exchanges and sell it at its current price. Then, at a later date, the investor buys the asset, and the difference between buying and selling determines the trade profit. So, for short-selling, you don’t need to purchase ethereum, Bitcoin, or any cryptocurrency you want to short-sell.

While it is a lucrative strategy and trading platforms like currency.com make trading a breeze, some investors don’t adopt this strategy out of fear of making losses. However, with a bit of understanding of long and short positions and how to short crypto, you can set yourself up to make gains.

What are long and short positions?

To make sense of shorting, familiarize yourself with long and short positions. A long position is when you borrow a cryptocurrency, hoping to make a profit once its value goes higher. For example, you buy an altcoin (cryptocurrencies other than Bitcoin) at $15 and expect the price to increase to $18. If the price increases to $18, you would be profiting from the difference of $3 in its price.

Holding a short position is when you borrow a cryptocurrency and sell it at its current price, hoping the price will fall. Later, if the price drops, suppose from $10 to $8, you would be making a gain of $2 from that trade.

Shorting is to make gains off an asset’s decrease in value. Traders and investors adopt a short-selling strategy when a cryptocurrency’s value is expected to decline. Since cryptocurrency markets are incredibly volatile, shorting is risky, and the results from trade are often unpredictable. While there is potential for a profit, there is a more considerable risk of making a loss.

At a long position, a currency’s value may decrease but never to zero, so you would still have the initial investment even if it’s not profit-bearing. However, when you hold a short position, there may be a scenario when the asset’s price increases immensely, resulting in a loss. Therefore, it is crucial to prepare yourself before holding a short position.

What are its pros and cons?

Before understanding how to short-sell crypto, familiarize yourself with its pros and cons since it is a high-risk strategy.

Pros

  • There is potential for making a high profit if you develop the right strategy
  • You don’t need to own a large sum of cryptocurrencies – minimal capital required
  • Multiple platforms to enable margin trading (using borrowed funds to trade an asset)

Cons

  • If the price of the cryptocurrency you are short-selling increases, the risk of unlimited losses increases
  • Payment of margin interest
  • Risk of a rapid increase in asset price (short squeezes) that can result in losses

How to short crypto

Before holding a short trading position, you must do your research. This is because many factors can shape the market, like politics, the influence of billionaires, celebrities, or influencers within the crypto arena, and the hype culture.

If you want to short-sell crypto, consider the following tips:

  • Find a trend

Since the market is guided by the motives and interests of notable people and other factors, you have to study the trends. First, find a trend, whether a high-end company’s sudden interest in Bitcoin or some Twitter post that hyped it.

  • Conduct a technical analysis

Technical analysis makes use of real-world data to make predictions about market behavior. For example, suppose you are interested in short-selling Bitcoin; you must review its past movement, volume, and performance. Specifically, you should consider its trading volume. Based on the Dow Theory, technical analysis presumes that an asset’s price depends on its current and past demand, the investor’s knowledge, market regulations, and future demand.

  1. Open a margin trading account

Margin trading is the act of borrowing an asset from a broker to perform a trade. For short-selling, you have to open a margin trading account. Most crypto exchanges allow short-selling, though you may have to check your country’s regulations regarding this practice. For instance, the UK has strict rules that discourage margin trading.

  1. Minimize your risk

To minimize losses, use the stop-loss strategy, where you denote an order to sell an asset at a specific price. Setting a limit on selling price decreases the risk of making a loss if you suspect the price will rise. Another way to minimize risk is to limit exposure by setting a cap on the asset’s price changes within a day.

Conclusion

Short-selling or shorting crypto can be an effective and lucrative trading strategy. If done right, investors and traders can make huge gains from the highly volatile cryptocurrency market. However, if you fall back on conducting proper research on trends and the currency you want to short-sell, the chances of making losses increase. In addition, countless new strategies with new tokens and coins are emerging daily. So take your time before making any move in the crypto trading market.

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Team 3ptechies is a legion of tech apostles who are gadgets freak, tech enthusiasts, and lover of modern techs. Note: Our words are ours and as such doesn't represent the opinion of 3rd Planet Techies.

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