Opening a “short” position is a good option for those who believe an asset will decline in value or want to hedge against a “long” position. Simply put, “shorting” is a bet that an asset’s value will decrease. If you’re an upstanding US citizen who’s not an accredited investor, shorting cryptos in some areas might be a challenge, and the number of coins you can short is also limited.
If you live in one of the states where Kraken, Poloniex, or Bitfinex are unavailable, you may have no other choice except to short bitcoin using CBOE bitcoin futures or CME bitcoin futures. As a result, you may only be able to short Bitcoin using CBOE and CME cash-settled contracts in specific jurisdictions. To make matters worse, you can only buy BTC and ETH futures through a small number of brokers.
How to short BTC and ETH
Shorting Bitcoin and Ethereum has become easier than ever before. Below are some of the more well-known ones.
Trading on a margin
The most common method of shorting security is to employ a margin facility provided by a broker or an exchange. To make things as easy as possible for yourself, you can just borrow the coins you need and then return them at a later time. Many crypto exchanges, such as Binance Futures and FTX, allow margin trading.
Furthermore, you should be aware of margin calls for the use of borrowed or leveraged capital. Therefore, even while profits may rise, losses may also come up as a result of this. An exchange broker will typically provide you a proportion of the money you can borrow to use in trading. However, if you borrow money, you’ll have to pay it back after a specific period of time.
It is possible to short-sell Bitcoin on margin at some big exchanges such as Kraken, even if you aren’t accredited. Despite the fact that many exchanges enable margin trading, it is advisable to pick an exchange with significant liquidity, which ensures that you can open and close positions swiftly and at a fair market value. One such exchange is Binance, which boasts some of the biggest verified trading volumes available. On top of that, Binance offers five times leverage on cryptocurrencies like Ether and Bitcoin, making it a great choice.
Futures
Bitcoin and ETH have futures markets, just like any other asset. When you buy a futures contract, you are taking a position in a specific commodity. Security will be sold at a predetermined price and at a specific time under the contract. A futures contract is a wager on the rise in the value of the underlying security. As a result, a positive return on investment is possible.
It’s also possible that the coin will lose value in the near future. After that, you’ll need to invest in futures contracts that bet on a falling cryptocurrency price. In essence, it means agreeing to sell a futures contract for less than the original purchase price. Moreover, new traders can get started at a relatively low cost.
CBOE and CME both provide Bitcoin futures contracts that can be purchased by anybody in the world. It is necessary to purchase a call or put options on a futures contract in order to short it. Leverage is available to you when you go through your broker.
Options
Bitcoin and Ether are available for option trading on some cryptocurrency exchanges. With an options contract, you have the choice (but not the duty) to buy or sell an asset at a predetermined price within a predetermined time frame. Due to their intricacy and use of leverage, options contracts are best suited for more experienced traders. However, because you only risk the premium on the options contract upfront, they’re a useful tool for shorting bitcoin.
The call and put options are well-known instruments in which you must execute a put order through an escrow or other services. Even if the market price of the currency lowers in the future, your goal is to sell it at its current value. Numerous offshore markets provide binary options trading. However, the costs and dangers of doing so are substantial.
Not selling your put options allows you to keep more of the money you earn. As a result, the only money you’ve lost is what you paid to create a put order. This is a low-risk, short-term contract trading strategy. It can go either way. The first consequence is that you make a predetermined profit. Alternatively, you risk losing the money you invested in opening the deal.
Use CFDs
CFDs are agreements to exchange the price difference between opening and closing a position in an asset. You would open a sell position in BTC or ETH if you had any reason to believe the price would fall.
Due to the fact that CFDs are leveraged, a little initial deposit (referred to as “margin”) is all you need to have full market exposure with them. When you short-sell on margin, you can increase your earnings if the market goes down, but you can also increase your losses if the market goes up. When you buy a CFD, you are betting that the price of BTC or ETH will decrease. As a result, you’re taking a short position.
Consider the following scenario: if Bitcoin is trading at $30,000, you would short sell it and then close your position when the price reaches $15,000. In other words, you made $15,000 in profit. As a bonus, CFDs can be settled at any time, unlike futures contracts, which have a fixed term.
In summary
As a general rule, “shorting” in trading refers to the practice of borrowing an asset and selling it for today’s price with a promise to return it at a later date. In this case, a trader hopes for a price drop so they can buy back at a reduced price and pay off their loan while also profiting. However exhilarating as shorting might be, it comes with a great degree of danger as well.
