You may have heard about the term “shorting” before, but don’t know exactly how it works. In simple terms, when you short an asset, you borrow shares from someone else (the lender) and sell them on the market.
When the price of the asset falls, you buy back the shares at a lower price to cover the difference between the sale price and the purchase price.
In regard to cryptocurrency, the answer is yes, you can short crypto. But it’s not as easy as it sounds. If you want to go down the path of shorting crypto, you need to be prepared for a lot of work and risk.
The first thing you should do is research your target coin or token, find out what its strengths are, and see if there are any major flaws in its design that could make it vulnerable to failure. This will help you determine whether it makes sense to short your assets.
If you want to find out how to short crypto, then you are in the right place. In this guide, we’ll be telling you everything that you need to know about how to short crypto. So keep on reading!
Reasons For Short Selling Crypto
While most people think of cryptocurrency as a safe investment, there are reasons why you might want to consider shorting it.
One reason is that the value of a currency depends largely on supply and demand. As long as people want to hold it, the value will rise.
When supply outweighs demand, the value drops until demand catches up. If you believe this scenario is likely to happen, then you should be able to earn a profit by shorting crypto.
Short sellers typically use technical analysis to predict future price movements.
Technical analysis is used by traders who want to make money by shorting cryptocurrency and there are plentiful bloggers who can provide you with up-to-date information about which coins are the best to short.
What Are The Risks Of Short Selling Crypto?
One risk associated with short selling is that you may lose money. When you short, you essentially bet against the price of an asset increasing. If the price does go down, you have to pay back the loan plus interest.
Another risk is that you may not get paid back. Some exchanges don’t always pay out on time. In addition, you may find yourself unable to cover your short positions. If this happens, you’ll have to pay back the full amount owed plus interest.
Assets like Bitcoin can provide ample opportunity for short selling. There are many ways to do it, but you should always consider your investment goals when deciding if shorting is right for you.
How To Short Bitcoin In 2022
Short selling bitcoin is a far more advanced strategic move as it requires specific timing and involves substantial risk when compared to just buying or selling bitcoin.
You will need to maintain a vigilant eye on the market to ascertain when to short sell your bitcoin and conduct thorough research into the process of shorting as this method is typically used by more experienced traders.
Shorting Bitcoin With Futures Contracts
Bitcoin futures are used as a tool to make money from Bitcoin. Traders use futures to bet on whether Bitcoin prices will rise or fall.
Futures contracts are very risky because there is always a chance that they could go wrong. These contracts are also not regulated by the government, so you cannot be sure what happens when things go wrong.
This lack of regulation is another reason why future contracts are commonly used by experienced traders to short cryptocurrency and is a key reason why many of the more well-known exchanges do not allow you to short crypto.
Shorting Bitcoin With Options Contracts
Options are similar to futures in terms of how they work. They allow investors to bet on the future price of an asset. There are two types of options: puts and calls.
A put option gives you the right to sell an asset if the price drops below a specified level but it is not recommended for shorting cryptocurrency.
A call option gives you the right (but not the obligation) to buy an asset at a specified price. Both of these options are traded on exchanges.
Shorting Bitcoin With Leveraged Trading
There are some financial intermediaries offering leveraged trading products like CFD and spread betting.
This might be the riskiest way to short sell Bitcoin as leverage means taking bigger risks with your money. Investors could lose more than they invested.
Things To Avoid
If you’re planning on shorting Bitcoin, you’ll probably want to avoid selling puts. They are extremely risky because they give up some upside profits in exchange for covering losses. That means you might end up losing money even if the price goes up.
If you’re looking to short other cryptocurrencies, you’ll also want to avoid putting too much money into one trade. A single large position can cause your account balance to fall below minimum requirements.
Does Coinbase Allow Shorting?
You can’t short cryptocurrencies on Coinbase. This is because it is a beginner-focused exchange and shorting is a strategic move that is more suited to those who have experience in trading.
To conclude, you can short cryptocurrencies like Bitcoin by using the methods that have been outlined above. These methods include using futures and options contracts or leveraged trading.
You should avoid selling puts as a means of shorting cryptocurrency, as this is a notably riskier method of shorting.
You should avoid shorting cryptocurrency if you are not an experienced trader as it requires a considerable amount of expertise and specified timing in order to short-sell cryptocurrency correctly and effectively, otherwise you run the risk of losing a substantial amount of money.
We hope this guide has helped you. Thanks for reading!