Is shorting crypto risky?
The price of Bitcoin is volatile and prone to sudden increases or decreases. Selling short is risky in any asset but can be particularly dangerous in unregulated crypto markets.
Margin Risk: When you're shorting crypto, you're typically opening a margin position to borrow the BTC that you then sell. This can be risky if you opt to use more than 1x leverage. For example, if you short BTC using 5x leverage, you only need the market to gain 20% in value for you to lose your entire collateral.
Shorting potentially allows traders to profit from a decline in the price of Bitcoin and other cryptocurrencies. It is also used as a strategy by some traders for hedging risks in unpredictable and volatile markets.
For a better understanding, you can think of crypto long and short positions as respectively buying and selling a crypto. You may see more long positions when most traders hope for a bullish market, while more in favor of short positions can mean the majority expects prices to go down.
Hedging Risk — Traders use short selling as a risk management tool. If they hold a long position in a cryptocurrency but anticipate a price decline, they may short the same cryptocurrency. All this to offset potential losses in their long-position.
Short selling comes with numerous risks: 1. Potentially limitless losses: When you buy shares of stock (take a long position), your downside is limited to 100% of the money you invested. But when you short a stock, its price can keep rising.
When an investor or trader enters a short position, they do so with the intention of profiting from falling prices. This is the opposite of a traditional long position where an investor hopes to profit from rising prices. There is no time limit on how long a short sale can or cannot be open for.
Margin trading is one of the most common ways to short crypto and you can do it using a variety of popular crypto exchanges that offer margin trading like Binance, Kraken, and KuCoin.
While short squeezes are most commonly associated with the stock market, they can also occur in the cryptocurrency market. Similar to stocks, investors can short sell cryptocurrencies if they expect the price to fall.
Understanding Short Term Crypto Trading
This approach differs from long term investing, where investors hold onto their assets for extended periods. There are several benefits to engaging in short term trading, such as the potential to take advantage of price volatility and make quick profits.
How does shorting crypto work?
Shorting Bitcoin is borrowing and selling Bitcoin, hoping that prices will go down so you can buy Bitcoin at a lower price to repay the loan and profit. Derivatives such as options or futures can give you short exposure, as can margin facilities available on certain crypto exchanges.
| # | Cryptocurrency | Cons |
|---|---|---|
| 1 | Bitcoin (BTC) | Scalability issues, high energy consumption |
| 2 | Ethereum (ETH) | Scalability challenges, gas fees |
| 3 | Polkadot (DOT) | Less established than Ethereum, complex technology |
| 4 | Matic (MATIC) | It relies on Ethereum's security, competition in the L2 space |
Investing in cryptocurrencies for long-term purposes can be a viable strategy, considering their potential for value increase over time. However, it's crucial to conduct thorough research, diversify your investment portfolio, and be prepared for the inherent volatility in the cryptocurrency market.
Can you short sell bitcoin? Yes, like other financial instruments, bitcoin is available to 'sell' and go short. However, short selling bitcoin can be a complex process and varies depending on whether you intend to use a cryptocurrency exchange or a leveraged trading provider.
Short Bitcoin with futures on Coinbase
To short Bitcoin through futures, go to the “Futures” section and select a Bitcoin futures contract. Opt for either “Market” to short immediately or “Stop-limit” to specify a sell price. Enter the number of contracts and leverage, preview and confirm the order.
Short selling ether generally requires a margin account on a cryptocurrency exchange. Shorting ETH allows traders to potentially profit when the price falls. This can be a way to hedge other crypto holdings or capitalize on bearish market sentiment.
The maximum profit you can make from short selling a stock is 100% because the lowest price at which a stock can trade is $0. However, the maximum profit in practice is due to be less than 100% once stock-borrowing costs and margin interest are included.
Drawbacks of short selling
Financial experts consider short selling to be quite volatile, and there remains the probability of losses without a limit. There is a high risk associated with this strategy because stock prices change rapidly. Lenders may recall the borrowed stock at any time.
Short selling a stock is when a trader borrows shares from a broker and immediately sells them with the expectation that the share price will fall shortly after. If it does, the trader can buy the shares back at the lower price, return them to the broker, and keep the difference, minus any loan interest, as profit.
This can lead to extra payment by the Exchange to purchase the shares of the sellers. The extra expenses are to be paid by the person who has defaulted by short delivery. Apart from the extra expenses, the defaulter also has to bear the penalty of . 05% of the value of the stock on per day basis.
How long should you keep crypto?
Crypto hodling is a long-term strategy that could provide a safer investment option, especially for inexperienced asset owners. “Sit back, relax and go back to your investment in five years' time” is often a mantra in financial markets, and the crypto industry is no exception as this is also the hodlers' motto.
Short interest is determined by the number of shares sold short divided by the stock's float (or number of shares outstanding). For example, if 100 million Apple shares are outstanding and 10 million Apple shares are shorted, we can say the short interest on Apple is 10 percent.
Shorting cryptos with CFDs
With us, you can short crypto like bitcoin, ether, litecoin, chainlink, uniswap and polkadot using CFD trading. When shorting cryptocurrency using leveraged products like CFDs, you'll take a position on the rise and fall of the underlying volatile crypto market.
The total short interest in crypto stocks is $10.7 billion, with MicroStrategy and Coinbase making up 84% of these bearish bets in the sector, Dusaniwsky said in the report.
Opening a spot position on margin (also called "margin trading") can amplify your exposure to market volatility, giving your trading strategies even more flexibility. Kraken offers over 100 margin-enabled markets for you to buy (go "long") or sell (go "short") Bitcoin with up to 2-4x leverage.
