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Views: There are two ways to trade in the cryptocurrency market and one of them is shorting (short). In this type of trading, unlike long, you can not trade on the spot and need to borrow assets, but there are a number of other features that are important to consider.
Short selling (short) in cryptocurrency - the principle of operation
Short selling (shorting) in cryptocurrency is a trading strategy in which a trader borrows an asset, sells it at the current price, and then buys it back at a lower price, returning the loan and receiving the difference as a profit. This method allows you to make money on a drop in the value of digital assets.
What short selling is used for
Traders use shorting for several reasons:
Speculation - making profits in a falling market.
Risk hedging - protecting assets from a possible drop in value.
Long-term investment strategies - balancing a portfolio when volatility is high.
Assessing the market situation
Before opening a short position, it is important to assess the current market situation using various methods of analysis.
Technical analysis
Technical analysis involves studying price charts, indicators and trading volumes. Important signals for entering a short position:
Formation of downtrends.
Moving averages crossing (e.g. dead cross).
High RSI levels (overbought).
Formation of reversal candlestick patterns.
Strong resistance levels
Sentiment Analysis
Sentiment analysis allows you to understand the psychology of the market through:
Fear and greed indices.
Social media and news trends.
Volume of short positions in the market.
Fundamental Analysis
Fundamental analysis focuses on assessing the real value of an asset. Key factors:
News about regulations and laws.
Data on project development and technological changes.
Movements of major investors (whales).
The main ways to short a cryptocurrency
There are several main ways to short cryptocurrency, each with its own features, benefits and risks.
Margin trading
Margin trading (margin trading) is one of the most popular ways to short cryptocurrency. It allows traders to borrow money from the exchange (or other users, depending on the platform) to open a short position.
How it works:
A trader borrows cryptocurrency from an exchange and sells it at the current price.
If the price falls, he buys the same amount of cryptocurrency at a lower price.
The difference between the selling price and the buying price is the profit.
He then returns the borrowed funds to the exchange along with the interest for use.
Pros:
Possibility of increasing profits through leverage.
Support on most major exchanges (Binance, Bybit, Kraken, etc.).
High liquidity.
Minuses:
High risk of liquidation when using high leverage.
The need to pay commissions and interest on borrowed funds.
Requires a good understanding of the market.
Futures trading
Futures (futures) are derivatives that allow traders to enter into contracts to buy or sell cryptocurrency in the future at a predetermined price.
How it works:
A trader opens a short position (short) on a futures contract.
If the price falls, he closes the contract with a profit.
Unlike margin trading, the contract itself is used here, not the actual cryptocurrency.
Pros:
Ability to trade with high leverage (up to 100x on some exchanges).
Futures markets have high liquidity.
Can hedge risks using hedging contracts.
Minuses:
Difficult to understand for beginners.
Possibility of liquidation in case of sharp price jumps.
Funding rate (funding rate) can reduce profits.
Binary Options
Binary options are speculative financial instruments that allow you to bet on the direction of cryptocurrency price movement during a certain period of time.
How it works:
The trader selects an asset (e.g. Bitcoin) and indicates that the price will fall.
He sets an expiration date for the option (from a few minutes to a few days).
If the prediction comes true, he gets a fixed profit.
If the price did not fall - loses the invested funds.
Pros:
Ease of use - no need to understand the complex mechanics of margin or futures trading.
Possibility of high profits in a short time.
Does not require a large capital.
Minuses:
High risk of losing invested funds (typically 90%+ of traders lose money).
Limited risk management options.
Lots of unscrupulous platforms.
Inverted ETPs (Exchange-Traded Products)
Inverted ETPs (Exchange-Traded Products) are exchange traded instruments that allow you to capitalize on a drop in the price of a cryptocurrency without the need for leverage or futures.
How it works:
ETPs track the price of an asset in the opposite direction (for example, a -1x Bitcoin ETP increases in value when BTC falls).
Investors buy these products through exchanges.
When the price of the cryptocurrency drops, the value of the ETP rises, allowing you to capitalize on the drop.
Pros:
Ease of use - does not require active position management.
Lower risk compared to margin or futures trading.
Available on some traditional exchanges.
Minuses:
Not available on all cryptocurrency exchanges.
May have high management fees.
Long-term investments in such ETPs are inefficient due to rebalancing effects.
Standard Short
A standard short is a classic way of making money on a price drop used in traditional markets. It works similarly to margin trading, but without the use of leverage.
How it works:
A trader borrows cryptocurrency from a broker or exchange.
He sells it on the market at the current price.
When the price drops, he buys the asset back at a lower price and returns it to the lender.
The difference between the sale and purchase prices makes up the profit.
Pros:
Lower risk compared to margin trading (no forced liquidation).
Suitable for long-term shorting.
No dependence on futures contracts.
Minuses:
Requires a platform that supports standard shorting trades.
May require collateral or security.
Less available to retail traders.
How to short cryptocurrency on the exchange
Let's break down step by step how to open a short position on the exchange.
1. Setting up a margin account
Before you start shorting cryptocurrency, you need to open and activate a margin account on the exchange. In standard spot mode, users can only buy and sell assets they already own, while trading with borrowed funds will require a special account.
How to set up a margin account:
1. Authorize on the crypto exchange.
2. Go to the “Margin Trading” section (usually found under “Trading” or “Finance”).
3. Take a risk awareness test (some exchanges, such as Binance and Bybit, require you to confirm your understanding of risk before opening a margin account).
4. Accept the terms and conditions for using margin trading.
5. Activate a margin account.
You will then be able to borrow and use leverage.
2. Choosing leverage
How to choose leverage:
Exchanges offer different leverage:
2x-5x (low) - suitable for conservative trading.
5x-10x (medium) - used by experienced traders.
20x-100x (high) - extremely risky and not recommended for beginners.
The higher the leverage, the higher the possible profit, but the risk of liquidation (forced closing of the position by the exchange) also increases.
When choosing leverage, it is important to consider your strategy and risk level in order not to lose your entire deposit due to sharp price fluctuations.
3. Margin deposit
Margin (margin) is a collateral used to secure borrowed funds. The more margin is deposited, the more positions can be opened.
How to deposit margin:
Transfer funds (e.g. USDT or BTC) to a margin account.
Make sure that the selected asset supports margin trading.
Use these funds as collateral to borrow cryptocurrency.
Margin determines how much funds can be borrowed. For example, if an exchange allows 5x leverage and you have 100 USDT, the maximum amount of a short position would be 500 USDT.
4. Cryptocurrency Borrowing
After depositing margin, you can borrow cryptocurrency to open a short position.
How to borrow:
Select a trading pair (e.g. BTC/USDT, ETH/USDT).
Determine the right amount of borrowed assets.
Borrow the appropriate amount of cryptocurrency from the exchange.
For example, if you want to short BTC, you need to borrow it from the exchange, then sell it at the current rate, and later buy it back cheaper.
It is important to consider the interest rates for using borrowed funds. Exchanges charge a fee for borrowing, and this can vary depending on market conditions.
5. Cryptocurrency trading
Once you have borrowed funds, you can open a trade.
How to open a short:
1. Go to the trading terminal and select the “Margin Trading” mode.
2. Select the order type:
Market Order (Market Order) - instant execution at the current price.
Limit Order (Limit Order) - sell at a predetermined price.
3. Sell the borrowed cryptocurrency on the market.
4. Wait for the price to decrease.
If the cryptocurrency rate falls, the trader can buy it back cheaper and make a profit.
6. Repaying the loan
To lock in the profit and close the short position, you need to buy back the sold cryptocurrency and return it to the exchange.
How to close the position:
Buy back the same amount of cryptocurrency that was borrowed.
Go to the “Margin Trading” section and select “Repay Borrowed Assets”.
Return the borrowed assets along with the interest.
Example:
You borrowed 1 BTC and sold it at $40,000.
The price drops to $35,000 and you buy 1 BTC back.
You return the BTC to the exchange and record a profit of $5,000 (excluding commissions).
If the price goes up, the trader will incur losses, and in case of a strong increase, the exchange can forcefully close the position to avoid defaulting on the debt.
Features of downside bets in crypto trading
1. High volatility of cryptocurrencies
The cryptocurrency market is known for its high volatility. The price of bitcoin or altcoins can change by 5-20% per day, and even 50% or more in a short period of time during strong movements.
How this affects shorting:
On the one hand, high volatility creates more opportunities to make money on dips.
On the other hand, it increases the risks of liquidating a position, especially when using leverage.
2. Leverage and margin requirements
Most short positions in crypto trading are opened using leverage.
The main aspects are:
Leverage (e.g. 5x, 10x, 20x) increases potential profits but also increases risks.
Exchanges require margin (collateral) to be maintained at a certain level.
If the margin drops to a critical level, the exchange may liquidate the position, resulting in a total loss of the deposit.
3. Funding Rate and Costs of Shorts
In the open-ended futures markets, exchanges apply a funding rate.
How it works:
If most traders are long (betting on the upside), they pay the funding rate to those who are short.
If most traders are short, they pay those who are long.
This is done to maintain a balance between buyers and sellers.
Effect on shorting:
If the market is falling, the funding rate can be negative (shorts get paid).
If the market is rising, the funding rate is often positive and short traders pay a commission.
Example:
A trader has an open short position of 10,000 USDT.
The funding rate is 0.05% every 8 hours.
If the position stays open for 24 hours, the trader will pay 15 USDT (0.05% × 3 times).
It is important to take these costs into account when holding shorts for the long term, as they can eat up profits.
4. Short squeeze
Short squeeze is a phenomenon in which a sharp rise in price forces traders to close short positions en masse, creating additional buying pressure.
Example:
In 2021, Dogecoin experienced a short squeeze when its price went from $0.07 to $0.40 in 24 hours, liquidating millions of dollars in short positions.
5. Limited returns and unlimited risks
Unlike long positions, where an asset can grow unlimitedly, in a short squeeze the maximum return is limited.
Example:
If the asset falls from $1,000 to $0, the trader earns 100% of the position.
But if the price rises, the losses are theoretically infinite.
6. Using derivatives for shorting
In addition to classic shorting, there are alternative instruments:
Futures - allow you to bet on the downside without having to borrow the asset.
Options - gives the right to sell the asset at a fixed price, hedging the risk.
Reverse ETPs - exchange-traded products that rise in value when the cryptocurrency falls.
Is it worth using automated trading systems
Shorting bots can almost completely automate the trading process and minimize the human factor. However, it is important to realize:
They require customization and monitoring.
It is important to take into account market changes and adapt your strategy.
Automated systems do not guarantee profits.
Risks of shorting cryptocurrency and whether it's worth doing it
Shorting is a complex strategy that requires knowledge and experience.
The main risks are:
Unlimited losses, as the price of the asset can theoretically grow indefinitely.
Liquidation of positions, especially with high leverage.
Influence of news and manipulations on the crypto market.
Shorting is suitable for experienced traders who know how to analyze the market and manage risks.
Conclusion
Shorting cryptocurrency is no less profitable strategy than the others, especially in a falling market, but it is associated with high risks. Successful trading requires in-depth market analysis, discipline and money management. Beginning traders should practice on demo accounts and learn the basics of trading simpler strategies such as spot before risking real money in shorting.
Frequently asked questions
1. Is it possible to short cryptocurrency without leverage?
Yes, it is possible when trading through futures or options.
2. Which exchange should I choose for shorting?
Popular platforms: Binance, Bybit, OKX, HTX, Gate. io, BingX..
3. Can I make money from shorting in the long term?
Yes, but it requires a strategic approach and competent risk management.
4. How to minimize risks when shorting?
Use stop losses, do not trade with high leverage and analyze the market before entering a trade.
5. How does shorting cryptocurrency differ from shorting stocks?
The cryptocurrency market is more volatile and the liquidity of assets is lower, making it less predictable.
