A common misconception is that the only “sure” way to make a profit when investing in crypto is to buy the dip and sell it later at a higher price.
But crypto markets are unpredictable and there’s no such thing as a “sure” investing strategy.
Many investors turn a profit from doing a bit of the opposite thing, actually. They rely on the price going down.
In this guide, we will explain the process of shorting crypto and how to begin trading using this method.
What does shorting mean?
Shorting is a trading method in which you borrow an amount of cryptocurrency from a broker and you sell it at the current (in your position hopefully “higher”) price and expect it to fall at a later date.
When the price falls you buy back the same amount you sold and repay the loan you took out from your broker. The remaining difference is your trading profit.
Shorting crypto Benefits: Pros & Cons
While this strategy can yield some amazing profits it can also sink your finances into absolute negative space. This is not a method for beginners who are just now starting to invest in crypto.
Let’s begin with the Pros:
- you don’t need a big sum for a starting capital
Meaning that it can be much faster to gain bigger profits than from the traditional way of trading. When you take out a loan you’re essentially taking out an X amount of times of your starting sum.
- it provides you with more than one method of trading
(thus better protection for your portfolio)
Combining different methods of investing and understanding their risks and rewards puts you in a much more flexible position. This enables you to protect your portfolio better from market volatility and makes you adaptable.
- an opportunity for a significant profit
Since it’s a high-risk trading method it’s of course also a high reward. By taking out bigger loans and betting on these sums it’s much easier to generate rewards that would otherwise be difficult to reach.
What about the Cons?
- risk of incurring infinite losses
With shorting there’s no cap on the number of losses your portfolio can suffer. It’s a loan on a coin with an ever-changing price. If that price skyrockets overnight you will need to repay it and you can’t predict how much that could be.
- accumulating margin interest
As every other loan these also accumulate interest. So if you wait out until the end the interest rates might eat up a good portion of your profits.
- required in-depth analysis of all news and developments
In order to make informed decisions you will need to dedicate a good amount of time to follow everything that might influence the price of your coin. And apart from finance news it also includes all socio-political developments.
How to short Crypto: A-step-by-step
The first thing you’ll want to do is decide which currency you’d like to focus on. Whether it’s Bitcoin, Ethereum or something else it’s important you research its history and trends. Follow closely the developments around it and all news that may affect it.
Next you’ll have to set up a margins account on an exchange that supports short trading like Binance, Kraken etc.
There are a couple of different methods of short selling and we’ll go through each one.
- Direct Short Trades (Margin Trading)
This is the most straightforward way in which you simply borrow an X amount from a broker, sell it at the current price and buy it back when the price falls. You pay out the loan and interest and pocket the difference. All of these loans have a set deadline and they must be repaid by then.
For example you can take out a loan for up to 180 days on Binance but keep in mind that the interest rates are calculated by the hour.
- Future contracts
Some cryptocurrencies support future contracts.
A future contract allows you to sell a coin at a set date and price in the near future.
By buying this contract you’re actually betting on the price rising, then when you sell it it’s because you’re expecting an upcoming price crash.
- Put options
This is a method in which you’re shielding your investment from risk. This option allows you to purchase a coin on a predetermined price and date. But it’s not an obligation and you can sell it.
If you think that the price will fall and it does in the future after you’ve purchased it, you will make a profit from that.
If the price remains the same or rises, however, you will only pay the fee for the contract.
- Prediction markets
If you’re feeling cheeky there’s always prediction markets in which you can participate against other traders.. There you make a bet that a specific currency’s price will decrease by X percent. Another investor needs to match your bet.
If things go your way and the price decreases, you make a profit.
Long Trades vs. Short Trades: What are the differences
So what sets apart these two methods?
In Long Trades you’re betting that the price of the cryptocurrency will go up. That way you will be making a percent of profit based on the amount of capital you began with.
This means that you need a significant sum to start if you’re planning on building up your portfolio. This investing strategy may be unsuitable for those with smaller capital.
Though, we do need to keep in mind that long trading is much safer in terms of losses than shorting.
With Short Trades your losses can skyrocket overnight. Whereas we have a cap on the amount that can be lost with long positions, even if the currency drops to zero.
Generally, short is considered to be the riskier but higher rewarding strategy.
Long Trades vs. Short Trades: Which Should I Use?
We’ve already established the differences between the methods and what they are but the question remains:
To short or not to short: Which one should you choose?
It depends on your goals and expectations going into this. You need to weigh out the pros and cons in relation to your specific situation. You might find it useful asking yourself these questions:
- Am I doing this just to try it out or am I considering making serious investments?
- How much is my starting capital?
- How much can I afford to lose?
- Am I confident in my research?
- Do I have enough time to commit to this?
You should give some serious thought when answering these questions because this is a time-consuming endeavor that can’t be just abandoned if things aren’t going the way you thought they would.
Always think about the steps you’re going to make and refrain from jumping on hype trains that may cost all of your profit.
Read more: How to buy Bitcoin?