The world of cryptocurrency is undeniably unpredictable. It’s common for a currency to surge one day and then plummet the next, shocking investors. Price fluctuations are a constant occurrence throughout the day for most cryptocurrencies. Factors such as regulatory actions only add to the market’s volatility, often leading to sudden and fear-driven crashes.
To protect yourself from potential losses, it’s important to understand short selling. This strategy allows you to profit from declining prices, even if you don’t own the cryptocurrency you’re betting against. In this article, we’ll break down the concept of crypto shorts and how to use it in cryptocurrency.
The Concept of Crypto Shorting
Crypto shorting involves predicting a decrease in the value of a digital asset and taking action accordingly. Essentially, it is placing a bet against the asset. This concept applies to cryptocurrencies as well. If you believe that a specific crypto will experience a decrease in value, you may choose to borrow it and then sell it off.
During a crypto market crash, the main objective of shorting is to sell when the price is high and buy back at a lower price. In other words, it is the opposite of going long, where you expect prices to rise and buy crypto in the hopes of selling at a higher price.
However, during a market crash, crypto prices are continuously dropping. Therefore, following the downward trend, trading in that direction becomes the most profitable.
When shorting crypto, it’s crucial to remember that you’re not possessing the crypto you’re shorting. Instead, you must borrow it from your crypto exchange, which means you’ll likely have to pay interest for the privilege.
Shorting Crypto CFDs
A crypto contract for difference (CFD) provides a unique opportunity to invest in the price of a cryptocurrency without actually owning it. This derivative allows for speculation on the value of a cryptocurrency by acting as a binding agreement between a trader and a broker or crypto exchange.
By shorting a crypto CFD, you are placing a bet on the price of the underlying cryptocurrency to decrease. This results in a profit when your position is closed, either through manual intervention or triggering your predetermined stop loss or profit target.
In the event of a rise in the price of crypto, your position will be automatically closed to prevent losses exceeding your available capital in your trading account.
Shorting Crypto Futures Market
A futures contract is an arrangement that involves purchasing or selling an asset at a predetermined future date and price. A crypto futures contract tracks the price of a particular cryptocurrency, making it a highly effective tool for speculating on its future value.
When you purchase a crypto futures contract, you are essentially betting that the price of the underlying crypto will rise. Conversely, selling a futures contract means you anticipate a decrease in the value of the crypto.
This can be seen as “shorting” the crypto market, where you enter into a futures contract that bets on a future drop in price. Once the contract expires, the agreed-upon transaction is settled, and the contract is officially closed.
Shorting Crypto Put Options
A crypto option is a financial instrument that grants you the power to purchase or sell a predetermined amount of a specific cryptocurrency at a later date for a set price. If you’re looking to bet against a particular crypto, you can utilize put options. These contracts enable you to sell your holdings at a predetermined price, even if the future market value drops below the current price.
Crypto Short Selling Strategies
Like inverse ETFs, these crypto short-selling strategies will help you benefit from the declining values of underlying benchmarks:
- Sentiment Analysis
One undeniable fact is that the emotions of investors and traders heavily influence the crypto market. In contrast to traditional methods like fundamental and technical analysis, sentiment analysis considers intangible factors.
- Technical Analysis
A crucial aspect of analyzing cryptocurrencies is delving into their past price movements and patterns to predict potential future ones. This practice of technical analysis revolves around fundamental beliefs that price changes are not haphazard and the market operates in a foreseeable and orderly manner. As a result, we can confidently anticipate the recurrence of historical trends, especially considering the cyclical nature of the crypto market.
- Fundamental Analysis
Fundamental analysis is a crucial tool in determining the true value of a cryptocurrency. It delves into all the qualitative elements surrounding a cryptocurrency and its underlying blockchain. Crypto fundamental analysis examines fiscal performance, on-chain activity, and project characteristics.
When you engage in short-selling crypto, you are essentially making a wager on the decrease in its value. This involves borrowing crypto from a broker or exchange, selling it, and anticipating a chance to repurchase at a cheaper price. All of this borrowing and returning is seamlessly handled by the exchange, allowing you to reap the profits from the price difference.