How To Short Crypto | Comprehensive Guide

Imagine that you can make money on the fact that the price of cryptocurrency is falling. Sounds amazing, doesn't it? In reality, this can be done through something called short selling. In this article, we'll break down what shorting cryptocurrencies is, what methods exist, how to start shorting cryptocurrency and what risks are associated with it. We will also look at strategies that will help you successfully make money on a market downturn .

How to short cryptocurrency - step-by-step guide

Short selling, or “shorting cryptocurrencies,” is a way to make money on a decline in the price of an asset. Imagine this as borrowing an item from a friend, selling it now, expecting to be able to buy the same item cheaper and return it to your friend. You keep the difference in price as profit.

1. Choosing a short selling platform. Find an exchange or broker that offers cryptocurrency shorting. Pay attention to commissions and trading conditions.

2. Register and set up an account. Register on the chosen platform and go through the verification procedure.

3. Selecting a cryptocurrency to short sell. Select a cryptocurrency or token to trade down.

4. Analyse the market and determine when to enter. Use chart and news analysis to choose the best time to enter a short position.

5. Opening a short position. On the platform, select the desired instrument (CFDs, options, futures, etc.) and open a short position.

6. Monitoring and position management. Monitor the market and adjust your position if necessary.

7. Closing a short position. When the price falls to the desired level or when a loss occurs, close the position.

The main ways to short sell crypto

Short positions in cryptocurrency came to us from traditional financial markets, but with the development of cryptocurrencies and digital technology, this method has become available to crypto traders as well. Shorting cryptocurrencies is used to protect assets from falling prices and to speculate in bear markets .

• CFDs (Contracts for Difference) - allow you to speculate on the price movement of a cryptocurrency without actually buying it . You enter into a contract with a broker, and if the price falls, you profit from the difference between the initial and final price. Unlike buying cryptocurrency directly, CFDs allow you to use leverage . This means you can borrow money from a broker to increase the volume of the trade, potentially increasing your profits. However, it's worth remembering that as potential profits increase, so do the risks;

• Options - give you the right, but not the obligation, to buy or sell cryptocurrency at a certain price in the future . You can use put options to make money on falling prices. For example, if you believe that the price of Bitcoin will fall, you can buy a put option. If the price does fall, you can sell the Bitcoin at the higher price specified in the option and make a profit. Options provide flexibility because you are not obligated to exercise the contract if the market moves against you;

• Binary Options - you are forecast on whether the price of a cryptocurrency will be above or below a certain level at a given time . If you guess right, you get a fixed payout. Binary options are easy to use, but they carry high risks. You either receive a fixed amount of profit or lose your entire bet. This instrument is more suitable for those who want to make quick money on short-term price changes;

• Futures - commit you to buy or sell cryptocurrency in the future at a pre-agreed price . This method requires more knowledge and experience, but can be very lucrative. When you enter into a futures contract, you are committing to buy or sell a cryptocurrency at a certain date in the future at a predetermined price. If the price of the asset falls and you contract to sell, you make a profit. Futures allow you to accurately plan your actions in the market and use sophisticated hedging strategies;

• Cryptocurrency margin trading - allows you to borrow money to trade cryptocurrency, increasing your potential profits and risks. You borrow from a broker to increase your positions, which can lead to significant profits if you correctly predict market movements ;

• Asset borrowing (lending) - some platforms allow you to borrow cryptocurrency for short sales. You borrow assets, sell them at the current price, and then buy them back at a lower price, paying back the debt and keeping the difference.

Risks and opportunities of shorting crypto

Shorting cryptocurrencies carries both opportunities and significant risks.

How to choose the entry point to short crypto

Analyzing the market and determining the entry point for shorting cryptocurrency requires the use of various sophisticated analytical methods. Here are the key steps that can help in this process:

Technical Analysis

Charts and Patterns

Look for reversal patterns such as " head and shoulders" " double top" "bearish flag":

• Head and Shoulders. This pattern consists of three peaks: a central peak (head) above two side peaks (shoulders). The lines drawn through the shoulder peaks are marked with red dashed lines. This signals a possible downward trend reversal.

  Head and Shoulders llustration

• Double Top. This pattern is characterised by two consecutive peaks at the same level with an intermediate trough. The red dotted lines mark the peak levels. This indicates a possible reversal of the downtrend.

  Double Top llustration

• Bearish Flag. This pattern consists of a sharp decline in price, followed by a short period of upward correction (flag), after which the decline is expected to continue. The red dashed line shows the flag.

  Bearish Flag llustration

Indicators

• Moving Averages (MA): When a short-term moving average crosses above a long-term moving average, it can be a signal for going long. Conversely, when a short-term moving average crosses below a long-term moving average, it can be a signal for shorting.

  Moving Average Illustration

• Relative Strength Index (RSI): Values above 70 may indicate overbought conditions and a potential downward reversal while values below 30 may indicate oversold conditions and a potential upward reversal.

  RSI Illustration

• MACD Indicator: When the MACD line crosses below the signal line, it can be a signal to short and vice versa.

  MACD Illustration

Fundamental Analysis

News and Events

• Regulatory Changes: News about potential bans or restrictions on cryptocurrencies can trigger price drops;

• Project Announcements: Unsuccessful releases or negative news about major projects can affect the market.

Economic Indicators

• Institutional Investor Movements: Capital outflows from cryptocurrency funds can indicate a decline in market confidence;

• Trading Volumes: A sharp decline in trading volumes can signal an upcoming price drop.

Psychological Analysis

• Crowd Behavior: Excessive optimism and FOMO (Fear of Missing Out) can be signals to prepare for shorting.

General tips for shorting crypto

• Choose reliable сrypto exchanges

These platforms allow you to directly buy, sell, and exchange cryptocurrencies. They offer high liquidity, a wide selection of trading pairs, and advanced features for traders. These exchanges ensure the security of assets and offer various tools for convenient and effective trading. 

We have studied the conditions of top exchanges and suggest that you familiarize yourself with their offers.

• Use risk management

Always use stop-losses to limit potential losses. Also do not risk more than 1-2% of your capital on a single trade.

• Market Monitoring

Regularly review your trading strategy and adapt it according to market changes. Analyze the market on different time intervals to get a more complete picture of trends.

To short cryptocurrencies, carefully analyze the market

Oleg Tkachenko Author and expert at Traders Union

Shorting cryptocurrencies is a powerful tool for those looking to profit from a declining market. However, it requires deep knowledge, experience, and market understanding. It's important to remember that with great opportunities come great risks. Regardless of which strategy you choose, whether it's margin trading, using derivatives, or borrowing cryptocurrencies, always approach it with caution and thoroughly analyze the market. A prudent approach and well-considered decisions will help you not only minimize risks but also effectively leverage the opportunities that shorting cryptocurrencies provides.

Conclusion

Let's highlight the main aspects of successful short trading in cryptocurrencies:

First, shorting cryptocurrencies requires a deep understanding of the market and technical analysis . It's crucial to closely monitor news and trends that may affect the price of cryptocurrencies. Utilizing various tools such as stop-losses and limit orders can help minimize losses and protect capital. Traders should remember that the cryptocurrency market is highly volatile, and successful shorting requires attentiveness and discipline.

Second, different platforms offer a variety of opportunities for shorting cryptocurrencies . Choosing the right platform is crucial, as each provides different tools, fees, and levels of liquidity. Popular platforms such as Binance, BitMEX, and Kraken offer various options for traders looking to short cryptocurrencies. Researching the terms of each platform will help select the most suitable one for a specific strategy.

Finally, it is important to consider the risks associated with margin trading. Shorting cryptocurrencies can yield significant profits, but it also comes with high risks . Traders should be prepared for potential losses and always incorporate risk management into their strategy. Good preparation and a well-founded approach to trading will help minimize risks and achieve success in shorting cryptocurrencies.

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Team that worked on the article

Ivan Andriyenko

Author at Traders Union

Ivan is a financial expert and analyst specializing in Forex, crypto, and stock trading. He prefers conservative trading strategies with low and medium risks, as well as medium-term and long-term investments. He has been working with financial markets for 8 years. Ivan prepares text materials for novice traders. He specializes in reviews and assessment of brokers, analyzing their reliability, trading conditions, and features.

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Dr. BJ Johnson

Developmental English Editor

Dr. BJ Johnson is a PhD in English Language and an editor with over 15 years of experience. He earned his degree in English Language in the U.S and the UK. In 2020, Dr. Johnson joined the Traders Union team. Since then, he has created over 100 exclusive articles and edited over 300 articles of other authors.

Mirjan Hipolito

Cryptocurrency and stock expert

Mirjan Hipolito is a journalist and news editor at Traders Union. She is an expert crypto writer with five years of experience in the financial markets. Her specialties are daily market news, price predictions, and Initial Coin Offerings (ICO).