How to Short the Crypto Market

Shorting is a way to potentially profit from declining prices. Learn about what shorting means and how it works.

Key Takeaways:

• Shorting is a trading strategy where a trader borrows an asset, sells it, and buys it back later with the aim of profiting from an expected decline in its price. 

• Researching the market and cryptocurrencies can help inform on potential opportunities for shorting. Trading signals are also used to spot price trends and potential turning points.

• Shorting cryptocurrency can be done in a variety of ways on trading platforms like the Crypto.com Exchange. These include margin trading and derivative contracts, such as futures and options.

• Since markets can be unpredictable and volatile, shorting is a potential way to hedge against losses in other trading positions. 

What Is Shorting?

The term ‘shorting’ in trading comes from ‘short selling’, which refers to the strategy where a trader borrows an asset and immediately sells it with the aim of profiting from an expected decline in its price.

The short seller covers the position by buying the asset back sometime later at a lower price than what they initially sold it for, thus pocketing the difference. In essence, they are betting that the value of the asset will fall, enabling them to repurchase it at an even lower price later on.

Shorting can also be done via derivative contracts, such as futures and options. Derivative contracts allow the trader to have exposure to the price movement of an underlying asset (e.g., cryptocurrency) without having to actually own it.

How to Identify Market Trends and Potential Shorting Opportunities

Researching the market and cryptocurrencies can help inform on potential opportunities for shorting. Crypto.com University features articles covering these topics and more, including market cycles, how to do your own research (DYOR), and what influences cryptocurrency prices:

What Influences the Price of Crypto?

Four Phases of the Crypto Market Cycle

What Is a Crypto Greed and Fear Index?

Additionally, trading signals are commonly used to analyse price trends and potential turning points. Learn about the different types of trading signals in these useful articles:

 The Golden Cross and Death Cross in Crypto Trading

How to Read Candlesticks on a Crypto Chart: A Beginner’s Guide

After identifying a shorting opportunity and opening a trading position, it is important to monitor the position and consider adopting risk management strategies like setting stop-loss and take-profit levels. Ultimately, the price may increase instead of the expected decline, leading to potential losses. Additionally, since many shorting methods involve margin and, therefore, leverage, losses can be potentially magnified.

How to Short Crypto

Shorting cryptocurrency can be done in various ways on trading platforms like the Crypto.com Exchange. These include margin trading and derivatives, where available.

1) Margin Trading

Margin trading involves using borrowed funds to pay for a trade. It allows the trader to open a position without paying the full amount from their pocket. Margin enables the use of leverage, which can potentially magnify gains and losses.

Learn more about margin trading and leverage in Crypto Spot Trading vs Margin Trading: What Is the Difference?

Shorting via margin trading on the Crypto.com Exchange, for example, involves the following steps:

1. Sign up for the Crypto.com Exchange.
2. Open a margin trading account, if eligible.
3. Conduct thorough research on the market and cryptocurrencies to be traded.
4. Place a short-sell order.
5. Set stop-loss and take-profit levels.
6. Monitor the trade and manage risk.

2) Derivatives Trading

A commonly used type of derivative for shorting is the futures contract, which is an agreement between a buyer and seller to buy (also called ‘long’) and/or sell (also called ‘short’) an underlying asset (e.g., cryptocurrency) at a set future date (expiry date) for a set price. For example, a short futures position profits when the underlying asset’s price falls, while a long futures position profits when the price rises. Trading futures also involves the use of margin.

In the example below, Trader A longs a futures contract, with ETH as the underlying asset, at a set price of $1,300. On the other side of the trade is Trader B, who shorts the contract. For the sake of simplicity, we ignore the effect of margin and leverage.

Shorting with futures on the Crypto.com Exchange, for example, involves similar steps to margin trading, as shown above.

Options are another type of derivative that provides exposure to an underlying asset’s price movement. For example, buying a put option profits when the underlying asset’s price falls:

Learn more about futures and options in Introduction to Crypto Derivatives, Options, and Futures.

3) UpDown Options

Another way to short cryptocurrency is with UpDown Options, which are a special type of derivative that automatically terminates if the underlying cryptocurrency’s price hits a predetermined ceiling or floor, locking in profits or protecting against major losses.

With UpDown Options, users can choose to buy or sell a contract depending on which way they think the market will go. If they think the cryptocurrency’s price will rise, they can buy a contract to open a long position. If they think the price will decrease, they can sell a contract to open a short position.

Learn more about UpDown Options in What Are UpDown Options?

4) Strike Options

Strike Options present traders with a straightforward ‘yes’ or ‘no’ decision on price movements. Users make a prediction on whether the price of an underlying market will be higher than a certain price at a certain time. If a trader thinks it will be, they buy. If not, they sell.

For instance, say a BTC Strike Option contract expires at 4 pm with a strike price of $26,000. If a trader believes the asset’s price will surpass the strike price at expiration, they buy; otherwise, they sell. The maximum loss on their trade is the initial amount they invested to open the position plus fees, nothing more. This makes Strike Options potentially appealing to both novices and seasoned traders due to their straightforward nature in trading and clearly defined risk.

In addition, Strike Options offer a very fast-turnaround time of just a few minutes and can be traded from as low as $10.

Learn more about Strike Options.

Shorting as a Way to Hedge

Since markets can be unpredictable and volatile, shorting is used by some traders as a way to hedge — or protect — against losses in other trading positions. 

For example, if a trader buys Bitcoin on the spot market and its price falls, this could lead to losses. To hedge against the potential loss, the trader can short Bitcoin via derivatives, as the short futures position would profit if the price of Bitcoin falls.

Conclusion

Shorting potentially allows traders to profit from declines in cryptocurrency prices. It is also used as a strategy by some traders for hedging risks in unpredictable and volatile markets. For those wanting to short cryptocurrency, it is important to conduct thorough research, analyse market trends, adopt risk management strategies, and closely monitor positions.

Due Diligence and Do Your Own Research

All examples listed in this article are for informational purposes only. You should not construe any such information or other material as legal, tax, investment, financial, or other advice. Nothing contained herein shall constitute a solicitation, recommendation, endorsement, or offer by Crypto.com to invest, buy, or sell any coins, tokens, or other crypto assets. Returns on the buying and selling of crypto assets may be subject to tax, including capital gains tax, in your jurisdiction. Any descriptions of Crypto.com products or features are merely for illustrative purposes and do not constitute an endorsement, invitation, or solicitation.

In addition, the Crypto.com Exchange and the products described herein are distinct from the Crypto.com Main App, and the availability of products and services on the Crypto.com Exchange is subject to jurisdictional limits. Before accessing the Crypto.com Exchange, please refer to the following links and ensure that you are not in any geo-restricted jurisdictions for Spot Trading and Margin Trading. 

UpDown Options are subject to jurisdictional limits and only available to US users of the Crypto.com App. Foris DAX Inc. and Foris Inc. (d/b/a Crypto.com) offer connectivity to Crypto.com | Derivatives North America, which is regulated by the Commodity Futures Trading Commission, for the purpose of trading derivatives on and subject to the rules of Crypto.com | Derivatives North America.

Past performance is not a guarantee or predictor of future performance. The value of crypto assets can increase or decrease, and you could lose all or a substantial amount of your purchase price. When assessing a crypto asset, it’s essential for you to do your research and due diligence to make the best possible judgement, as any purchases shall be your sole responsibility.