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7 Ways to Short Crypto

Alex Lielacher
Last updated: | 5 min read

Bitcoin has been on a tear since the start of the year and “crypto winter” has officially been declared over by many analysts. While a lot is pointing towards a continuance of the current “crypto spring” rally, some investors (and notorious bitcoin bears) believe that we could see a correction in the coming months.

Source: iStock/vm

In this guide, you will discover seven ways that you can short cryptoassets if you have a bearish outlook for 2019.

Shorting on digital asset exchanges

Perhaps the simplest way to short cryptoassets is on digital asset exchanges that enable margin trading. Exchanges such as BitMEX, Bitfinex, and Poloniex allow traders to short cryptocurrencies on margin.

To short sell crypto on a digital asset exchange, you need to borrow a cryptoasset from margin lenders to sell the asset that you do not own and then, buy the asset back once your target price has been met so that you can sell it back to the lender. The exchange handles the backend of this process and you will be charged a borrowing fee for each day that you are shorting the asset.

Your profit (or loss) will be the difference between the price you short sold at and the price at which you have bought the asset back at minus the margin lending fee, which differs from platform to platform.

If you are using leverage, this profit or loss can be amplified by the leverage ratio you choose.

Shorting crypto CFDs

Alternatively, you can also short cryptocurrency CFD (contract for difference) on online brokerages, such as CMC Markets or FXCM. For investors who are more comfortable with trading on traditional online brokerages as opposed to digital asset exchanges, this may be the most suitable options for going short crypto.

The process of short selling a cryptocurrency CFD is the same as on a digital asset exchange with the key difference being that the profits are paid out in fiat currency as opposed to digital currency.

From a user point of view, all you need to do is ensure you have enough funds on your account to cover margin requirements and to hit the sell button on the cryptocurrency CFD of your choice at the price level you want to short it at.

Daily borrowing fees also apply to CFDs. These need to be taken into consideration when short selling an asset. The longer you hold onto your short position, the more the borrowing fees will add up.

Selling crypto futures

If you want to short cryptocurrencies such as bitcoin (BTC) or ether (ETH), you could also sell futures on cryptoasset derivatives trading platforms, such as Deribit and Quedex.

Futures are financial derivatives that enable traders to buy or sell an asset at a predefined price at a predetermined date in the future. Futures, therefore, allow you to bet on the price development of an asset without having to own it.

The process of selling futures is effectively the same as shorting cryptocurrencies on digital asset exchanges or CFD brokerages but requires a bit more understanding of derivatives. Hence, it would be an option for more experienced traders.

Buying crypto put options

As an alternative to selling futures, you could also use financial options to generate a potential profit in a falling market. Options are financial derivatives that provide the holder with the right but not the obligation to buy (or sell) an asset at a specific price on a predetermined future date.

If you believe that the price of bitcoin will lose over 50% of its value and drop below the USD 5,000 mark within the next three months, you could buy a bitcoin put option with a strike price of USD 5,000 that expires in September.

You will have to pay the premium (also known as the price) of the put option and if the price of bitcoin drops below the USD 5,000 mark, your profit will be the difference between the price at which you execute your option and the market price of bitcoin minus the amount you paid for the premium.

Options are, therefore, a reasonably inexpensive way to short cryptoassets as you only lose the premium if the option expires and the strike price has not been met. However, due to the technical aspects of options, they are better suited for more experienced traders than beginners.

Going short in prediction markets

If you are comfortable interacting with the Ethereum blockchain and dealing with smart contracts, you could also express your short view on a specific cryptoasset on prediction platforms.

Decentralized, peer-to-peer prediction markets, such as Ethereum-based Augur, enable individuals to bet on the outcome of certain events, such as asset prices, elections, the weather or anything else that users can come up with, using cryptocurrency as a stake.

If your prediction turns out to be correct, you win and are rewarded in cryptocurrency.

Prediction markets offer a wide range of possibilities to bet on the price of different cryptoassets, so they can also be used to express short views.

Short Selling Crypto ETNs

If you prefer to trade regulated financial products and want to short cryptocurrencies, you could short sell cryptocurrency exchange-traded notes (ETN), such as the Bitcoin Tracker One, Litecoin Tracker One or the Ether Tracker One by XBT Provider, on the Stockholm Stock Exchange.

To put on such a trade, you will require a brokerage account that supports crypto exchange-traded notes as well as short selling.

Selling binary options

Finally, you could also use so-called “binary options” to express your short view on a specific cryptoasset.

Binary options are financial derivatives where the payoff is either a fixed monetary amount or zero. Most binary options markets have maturities of ten minutes, thirty minutes or one hour, which means you are betting on whether the price of the underlying asset goes up or down within a very short time period. As a result, these are highly risky financial products that should only be utilized by experienced traders who fully understand the product.

However, if you believe that, for example, the price of bitcoin will end the day in the red because of an expected regulatory announcement or because an exchange hack occurred, you could sell an end-of-day binary option on bitcoin that pays out once the trading day (as determined by the brokerage) has come to a close.

Read more: Arca’s Lawyer Warns Against Crypto Derivatives