How to short cryptocurrency: A short guide
The cryptocurrency market is volatile, with prices jumping up and down daily. While you probably invested in crypto hoping prices rise, you can also short cryptocurrency – which means you profit when the price falls.
Taking a short position alongside your long positions on crypto is a good way to leverage your portfolio and hedge against volatility. In the event of flash crashes, these short positions can be an invaluable counterweight to any losses from your crypto holdings.
A brief history of short selling
Many of us have watched The Big Short, a movie about a small group of traders who foresaw the global financial crisis in 2008, but how many of us fully understand what they did? And how did they make their fortunes when seemingly everyone else lost?
In a nutshell, they predicted the real estate market in the US would collapse under the weight of subprime mortgages. In 2008, the prediction came true, and while the likes of Fannie Mae, Lehman Brothers, and other financial institutions disappeared, the small group of investors who saw it coming made huge profits.
While the movie plot may have been complex, the concept of short selling is simple:
Short selling is borrowing an asset and then selling it immediately in the hope that the asset price drops before you repay. If the price drops, you would pocket the difference.
If it rises, however, you would need to pay the difference.
Short positions or short selling have been a cornerstone of the stock markets for centuries, with it first being recorded in 17th century Amsterdam. It has since been regulated and controlled by governments around the world in an effort to stop excessive speculation of the markets.
As cryptocurrency moves into the mainstream, short positions are now a feature of a dynamic crypto market.
Can you short crypto?
In short, yes. Like in any financial market, you can take short or long positions on cryptocurrency. Taking such positions can prove to be smart leverage against the volatility of the market. If you play your cards right, you could be able to make money whether prices go up or down.
Right now, you might be asking yourself how you can short sell cryptocurrency.
There are four different methods to shorting crypto, which I’ll go through with you.
How to short cryptocurrency: The 4 methods
Before we get started, I want to clarify that this is not financial advice, and this post aims to help you understand the concept of shorting crypto. It carries risk, with investors potentially losing an infinite amount of money if it goes wrong. It is essential that you understand the risks involved and be able to manage those risks appropriately.
Now let’s dive into the meaning of short trading with crypto:
1. Margin trading
With margin trading, you’re effectively “borrowing” from somewhere like MyConstant’s short selling product to buy and quickly “sell” back the crypto at the market rate. In doing so, you will be hoping to rebuy back at a lower price later on before returning it back to the lender. If it works as planned, you can pocket the price difference as profit.
However, if the price goes up, you will end up paying the difference to the lender.
Bear in mind this could lead to high losses if the price rises, given the leverage involved, amplifying your losses and profits. For instance, if you are borrowing at a 1:3 leverage, your potential losses could reach three times your initial loan before the lender closes your position because it knows you don’t have the collateral to cover your losses.
Of course, this could go the other way, and you could triple your initial outlay, but remember to consider the risks.
2. Contracts for difference (CFDs)
If you are an experienced dealer, you might want to consider CFDs, a contract between you and the exchange. The contract sets the value of an asset – in this case, cryptocurrency – and the agreed time at which the contract would end.
At the endpoint, if the crypto is down, then the exchange would pay you the difference. If the price has gone up, then you will need to pay the difference to the exchange.
It is a highly sophisticated way to short crypto and is only recommended for experienced traders. It is also unavailable in the United States due to securities law.
A good platform to use is Plus500, which gives traders the ability to trade cryptocurrency CFDs without needing a wallet or going through an exchange. This option allows you to trade at 1:3 leverage, which could mean you can gain $3,000 with $100 capital. The pinch, though, is you could also lose that much.
At MyConstant, we offer a Futures product to our non-US customers. Futures trading is a form of predicting the market, where you can borrow crypto from a platform like MyConstant, and profit from a price prediction.
The key with a Futures product is that you can make money whether you are going long or short. With MyConstant, for example, if you believe ethereum will rise in price, you put down USD collateral, and we buy the equivalent amount of crypto at 50x leverage.
If your prediction is correct, you could earn up to 2.5x your collateral as a return. If you’re wrong, you lose your collateral. It works the same way if you predict ethereum will fall in price. You can repay your Futures position at any time to take a smaller profit or minimize the loss of your USD collateral.
The other benefit of Futures is the low barrier to entry. You can put down a small amount of USD and keep any potential losses to a minimum as you learn about the crypto market.
Some crypto exchanges offer a similar service but with higher risk/reward ratios.
4. Prediction markets
Another simple option of shorting crypto is the relatively new prediction markets, where you can place a bet on whether the price will go up or down. This would give you a limited return, but it also limits your losses to your wager.
It works by predicting, for example, bitcoin would move up or down by a certain margin. If someone takes you up on that bet, then it’s on, and you can see how the market plays out. You can do this using fiat currency like USD without having to buy any crypto. It is a good way to mitigate the risks associated with short selling and learn more about how the market reacts to certain events.
This is an emerging area of crypto, where platforms have only begun to appear within the last five years. A good example is Stox, which is based on the Ethereum blockchain network. Its peer-to-peer model enables traders to easily make predictions of the market, if they get it right, they gain ethereum or stox tokens.
Where to short sell crypto
The most obvious place to look is on the exchanges like Binance and Kraken, but what if you want to minimize your risk and potential losses? MyConstant offers you an alternative that not only gives you more control, but is cheaper to use than these exchanges.
Our Futures product, which I spoke about earlier, is a great way to get started on shorting crypto. The product allows you to use your collateral (held in USD) to predict which way the market will go. The best thing about it is that while your profits can be amplified by our leverage, your losses will be capped at your collateral.
Short selling with MyConstant
We offer another short-selling option alongside our new Futures product, where you can pair BTC, ETH, or BNB with USD. The process is straightforward – deposit the USD into your short-selling balance, and then select how much of your chosen crypto you want to short.
Bear in mind that your collateralized USD is a risk if your crypto increases in price. So, consider carefully what you can afford to lose.
It a good idea to set a stop-loss and take profit mechanism, which can help secure profits and limit your losses. Once that is all set, you can then hit that “Short Crypto Now” button. The other key benefit of short-selling with us is that you can repay at any time, which allows you to capitalize on any profit you may get.
However, if the price of your shorted crypto rises, your collateral will be at risk. Once your collateral value falls to 105% of your loan value (including relevant fees), we have to sell, and you lose it.
Short selling is risky to get into, and many seasoned investors have lost a lot of money using margin trading and CFDs. However, starting with MyConstant can provide invaluable insight into market movements and leave you in a better place to make more lucrative calls.
If you have any questions on this topic or our Futures product, don’t hesitate to contact us. We are here to support you.
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