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In a market as unpredictable as crypto, where prices can surge one day and just as easily collapse the next, it’s only logical to ask: is there a way to profit from the downturns? The answer is yes: shorting. Experienced traders short crypto to capitalize on dips in price, and therefore turning the market’s volatility into an opportunity for profit. Shorting is also a technique used in traditional financial markets, infamously leveraged before the 2008 Wall Street crash. But to short crypto comes with its own set of tools, risks and strategies that are important to grasp before any attempt to short a crypto position.
In this article, we take a look at what shorting crypto really is and how it’s done, why traders might decide to short crypto, and the potential consequences when it goes wrong.
What does shorting crypto really mean?
At its core, shorting crypto, also known as short selling, is a question of betting that a given asset, such as Bitcoin, will drop in price. You’re essentially betting against the market. In the world of cryptocurrency, shorting involves borrowing a crypto token, such as Ethereum, Bitcoin or Dogecoin from an exchange, selling at the current market price, and then buying it back later on at a lower price. In this ideal scenario, traders profit from the difference between the higher and lower price. The shorting strategy is rooted in traditional finance and has been used for decades by hedge funds to hedge risk or speculate on market downturns.
While shorting crypto is becoming more mainstream, thanks to user-friendly apps, exchanges and investment tools, it is still not as widely leveraged as long positions, that is, buying an asset in the hope it will increase in price. That is partly due to the fact that the crypto market is largely driven by a strong “buy and hold” mentality, fueled by a desire for long-term growth, utility, and technological advancement. Still, as the market matures and more traditional traders and investors enter the space, shorting has become an increasingly popular strategy to benefit from the market’s inevitable downturns.
How to short crypto in practice
There are several ways to short crypto in practice, each with its own level of complexity, risk and potential gain. The most common method is margin trading, where crypto traders borrow a crypto asset from an exchange, sell it at the current market price with the aim of buying it back at a lower value at some point in the future. While this can boost profits, it also increases risk, particularly in fast-moving markets such as crypto. Platforms such as Binance and Kraken offer margin accounts, but they require collateral and careful management of leverage.
More experienced traders often use derivatives such as futures and options. Futures allow traders to commit to selling crypto at today’s price on a future date, which is like betting on a market downturn. Options, and particularly put options, give traders the option to sell at a set price before expiry. Some exchange platforms also offer inverse or leveraged tokens, which are structured to gain value when the underlying crypto asset drops. Each of these strategies comes with its own benefits and risks, and it is important that traders fully understand those involved before starting to short crypto.
Why do traders short crypto?
Shorting crypto is not just a tool for speculation, it is a strategy that can also be used as a hedge. Traders and institutional investors may choose to short crypto to protect gains during market corrections or to offset exposure in other areas of their portfolio. When the crypto market is buzzing, tokens may be perceived as overvalued, and shorting crypto can serve as a rational counterbalance to irrational optimism.
It’s also a common strategy during bear markets with sustained downturns, offering opportunities for disciplined traders to profit from these declines. That being said, shorting is a high-risk strategy, particularly in the crypto market where price swings can be extreme and unpredictable. If the market moves against a short position, losses can, in theory, be unlimited, as there’s no cap on how high a crypto’s price could rise. A sudden rally can quickly wipe out any expected gains and lead to forced liquidation.
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