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What does it mean to short crypto?
Investing Basics
September 2, 2022

What does it mean to short crypto?

Is it possible to make money from crypto when you think the prices will drop? Can you make a profit in this market if you don’t even own any crypto? It is not as unimaginable as you may think. Allow us to introduce you to the concept of short selling. Often just called ‘shorting’. This investment method enables you to make money when you expect an asset’s price to drop.

What is shorting?

Before we explain how to short crypto, let’s understand what shorting actually means. Traditional trading, put very simply, comes down to a simple principle of ‘buy low, sell high’. Again, in a very simplified way, shorting is the opposite of that: buy high, sell low. You do this when you expect prices to drop. That’s how you can make a profit from a stock that’s going down. 

Example

Let’s say you can buy a share from company XYZ, worth €100. But you don’t have much faith in them (ouch!) and you expect the shares to drop. You could just choose to do nothing and let an opportunity pass you by. 

OR, you could short. This way you have a chance to make money from the loss. You do this by telling your broker you want to go short on these shares. Next, your broker will search for a share. You then borrow that share from a shareholder and sell it right away for its current price of €100.

That’s right! You don’t actually OWN the share. But you are selling it! That’s why it’s called ‘shorting’ because you are ‘short’ one share that you, eventually, have to buy back. 

So, let’s say your predictions were right. And the company’s shares drop in value from €100 to €70. Now you buy the share back for €70 and then give the share back to its rightful owner. Meanwhile, you are left with €30 in profit. Get it?

Can crypto be shorted?

Now you might be jumping up and down and can’t wait to try this shorting thing for yourself. With crypto. Of course. But wait a minute, can crypto even be shorted?

The short answer is yes. 

As you may know, there are many ways to start trading crypto - mining, buying, and more. Shorting crypto is one more method available to traders, but it is definitely harder than trading crypto itself. That’s because you need quite a bit of money to get started. And also, you need to be able to make good predictions about whether the value of your desired cryptocurrency will go up or down. 

Here are some ways one can short crypto:

Now that you know a bit more about shorting crypto, you may want to know how to do it. First off, you’ll need to find a trading platform that allows you to place a short sell order, or better yet find a platform where bots do the work for you. Then, there are several ways how you can short sell crypto. 

Let’s have a look.

Margin Trading

People often short-sell crypto in a margin account. This is probably the easiest way to short-sell crypto. Margin trading means that you borrow crypto from a broker so you can make a trade. Within this trading type, you’ll need to borrow or leverage money. This trading technique is meant for more experienced traders, and so having an automated trading platform do this for you could be a good idea. 

For instance, you may have heard of our BOTS app where automated bots trade for you. Since shorting, in general, involves more risk and requires a certain level of expertise, it could be a good idea to leave this up to automated trading bots who do the work FOR you. Although the BOTS app currently doesn’t have any short-selling bots, the team is always working towards adding more asset classes. So stay tuned! 

CFD

CFD stands for Contract for Difference. This means that, instead of actually borrowing crypto, selling it, and then buying them back at a lower price, you agree to just settle on the difference. So, with a CFD you’ll get paid the difference if the price drops. Without the hassle of selling and buying coins back. You can short with a CFD using the services of companies such as eToro, Plus500, and others. But you should be aware that this kind of trading is meant for experienced traders. It comes with high risks. 

Binary Options

Crypto Binary Options is another way to short crypto. In this type of trading, you predict if the price of the cryptocurrency will rise or fall by a certain time. Did your prediction come true (“In the money”)? Then you earn the payoff of the option. If not (“Out of the money”), then your investment is lost. With binary options, there are only two possibilities. You win or you lose. 

Is shorting crypto a good idea?

As mentioned before, shorting crypto is not easy. It’s harder than traditional crypto trading and comes with higher risks. With traditional trading, the worst-case scenario is that you lose your investment. But with shorting crypto, you could theoretically lose an infinite amount of money, because the price of your asset could go up, and up, and up. 

However, if you have a good feel for the market, shorting can be a good option for investors to look at. Remember to always choose trading options based on your plan and financial goals. 

Disclaimer: 

This blog is for educational purposes only. The information we offer does not constitute investment advice. Please always do your own research before investing. 

Any views expressed in this blog and by BOTS do not constitute a recommendation that any particular cryptocurrency (or cryptocurrency token/asset/index), portfolio of cryptocurrencies, transaction, or investment strategy is suitable for any specific person. 

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