Crypto short selling is done by borrowing crypto from your online broker or exchange (and usually paying a small fee, which is the price you pay for getting into a trade), selling them when their price is high, and purchasing them when their value falls. This will make a profit if the market is working in your favour and the crypto’s price goes down.
What is Short Selling?
Short selling or shorting, is when a trader sells a crypto asset at the current market price, and later buys it back at a lower market price. Traders using this technique commonly do so when they believe an asset will fall in price. The short seller borrows the asset against collateral and sells it. After the price has fallen, the individual buys back the same amount of what they originally sold, reimburses the collateral plus a fee, and pockets that profit.
A step-by-step explanation of the short-selling process
Here are five steps to follow for shorting cryptocurrency:
- Create an account: Register with an exchange that offers shorting features. Ensure the exchange provides various order types, such as market, limit, and stop-loss. Review the exchange’s policies and fee structure. ZebPay’s futures platform allows traders to take short trades. With a seamless signup process and with plenty of options, you can make your crypto trades work for you.
- Learn to Read the Market: Keep your confidence in a bearish trend by learning to read price charts; this step is necessary for executing good trades.
- Place orders at your desired price: Place a ‘sell/short’ order. Wait until the trade is completed.
- Close the trade: When the price drops, put in a ‘buy’ order to buy back the crypto at a lower price.
Short-selling strategies
Here are some prominent short-selling strategies for Bitcoin:
Perpetual Futures
A perpetual contract is an underlying contract which is linked to the price of a crypto asset. You can buy or sell these contracts. These contracts do not have an expiration date. The holder of the contract can buy or sell the tokens specified by the contract. Leverage can also be used to take larger positions with smaller upfront capital. ZebPay futures is powered by upto 20x leverage. Explore ZebPay futures today to know more.
Binary options trading
Call and put options can also be used to bet against crypto by placing an order for a put. The put option itself allows you to sell the crypto at its current value. Binary options exist on a variety of exchanges, although they are expensive and risky.
Using Bitcoin CFDs
A contract for differences (CFD) is a financial instrument that pays out based on the difference between the opening and closing prices. Bitcoin CFDs function similarly to Bitcoin futures, as they are bets on the crypto’s price movement. By purchasing a CFD anticipating a price decline, you are effectively shorting Bitcoin. CFDs offer more flexible settlement periods compared to the fixed dates of Bitcoin futures. Additionally, some Bitcoin CFD markets allow traders to trade based on Bitcoin’s performance relative to a fiat currency or another crypto.
Crypto Short Selling Example
For example, suppose Ether is trading at $10.25 and you anticipate its market price will drop. You might decide to open a short position on 140 Ether CFDs. A few days later, if the price falls to $9.12 and you close your position, you would make a profit of $158.2 ([10.25 – 9.12] x 140 = $158.2), excluding any additional costs.
Conversely, if the price of Ether rises, you would incur a loss. For instance, if Ether’s buy price increased to $12.45, you would face a loss of $308 ([10.25 – 12.45] x 140 = – $308), excluding any additional costs.
Is short-selling illegal?
Not at all! You can wager against crypto’s parabolic rises and falls to utilize derivatives such as perpetual futures or options. Shorting should always be paired with good risk management, sound research and an understanding of how crypto markets function.
Conclusion
In a volatile market like crypto, shorting offers traders a chance to profit from falling prices. However, despite its appeal, there are risks just like in any other market. Before shorting cryptos, ensure you understand all the associated risks. Familiarize yourself with various trading strategies and ensure that you fully understand the pros and cons.
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