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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 an asset that’s going down. 

Let’s dive deeper into this strategy.

Short-selling is often simply referred to as ‘shorting’. Simply put, this is an investment strategy where an investor makes money when they expect the price of an asset to drop. 

But why is it called ‘short selling’? Well, that’s because investors are short, i.e., they don’t really have the asset that they want to sell to make a profit. This technique is used in the world of cryptocurrency but isn’t exclusive to just crypto.

The basic mechanism of this strategy involves first borrowing an asset and selling it at the current price. Later, you then purchase these assets back from where they were borrowed. When you need to buy back these assets, the prices drop as expected. And so, theoretically, you will have spent less money to buy the assets than what you received when you sold them. 

And this is how investors end up making a profit on an asset that they haven’t bought yet.

Let’s put this into perspective with a very simple example:

  • Let’s say you borrow ten bitcoins ($1000 for 1 Bitcoin) and short sell them for $10,000
  • This leaves you with ten bitcoins short
  • Some time after you sell the coins, the price of bitcoins drops (as you had expected) to $800 per Bitcoin
  • This is your chance to repurchase the ten bitcoins, and you do so for $8000, and then you take those ten bitcoins back to the entity you borrowed them from.
  • In this example, using no assets of your own, you ended up making a profit of $2000 

Calculation: 

  • 10 Bitcoins borrowed and sold for $10,000
  • The price of 10 Bitcoins dropped to $8,000 - this is when you buy them and pay back
  • A profit made = $10,000 - $8,000 = $2,000

Keep in mind the consideration in the above example was the ideal scenario. Generally speaking, the more the prices drop after you’ve short-sold, the cheaper it gets to buy back the asset in question and the more profit you make. 

But what happens when the price of Bitcoin increases after you short? Or the entity you borrowed from asks you to buy back the assets you shorted before they dropped to your desired price? This is where the risk lies. When it comes to shorting, profits are generally capped, but there are no limits when it comes to losses. This is a crucial aspect to take into consideration, especially when we’re dealing with an asset as volatile as crypto. 

Using the same example we used above, let’s hypothesize what would happen if the price of Bitcoin had instead increased to $2000 per Bitcoin. 

  • To recap, you bought ten bitcoins for a total of $10,000
  • After you short-sold these, the price increased to $2000 per Bitcoin.
  • Now it is time for you to pay back, but it is going to cost you $20,000, so you will end up making a loss of $10,000
  • Additionally, we must also consider that your losses could significantly increase if the pressure on the market increases. 

Calculation: 

  • 10 Bitcoins borrowed and sold for $10,000
  • The price of 10 Bitcoins increased to $20,000 - this is when you decide to buy them and pay back
  • A loss is incurred = $10,000 - $20,000 = -$10,000

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. 

If you were following the example we shared just above, we simulated shorting Bitcoin which is a cryptocurrency. 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, don’t lose all hope. We at BOTS recognize that shorting is an option that investors want to look into. And this is why we introduced theBear Fighter bot in October 2022

Fund the Bear Fighter bot

This is also just the beginning of the many developments that are yet to come to the BOTS app. If you don’t already have the BOTS app, you can download it here. Remember to always choose trading options based on your financial plan and 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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