Short selling in Crypto: what it is and how it works

In a bear market, it is not surprising that it is difficult to make money. The price of each cryptocurrency is falling, so anyone who buys coins and hopes they will rise in price will likely be disappointed in the short term (hopefully the long-term picture will be better). However, even in a recession where everything is practically falling, there is at least one way to make a quick profit: short selling crypto.

Short selling involves lending an asset and selling it now at higher prices, before buying it back later in order to pay off the debt. The idea is that it will have decreased in price the moment you buy it back, allowing you to pocket the difference between the price at which you sold it and the one at which you bought it. This practice of selling short assets has been common for over a century, and is now also a big fixture in crypto, accounting for just over 30% of all bitcoin options accounts on Binance (at the time of writing).

As a result, this article will explain how to short sell cryptocurrencies. It will provide detailed instructions for shorting cryptocurrencies on a number of major crypto-exchanges, while also providing alternatives to direct shorting, such as buying futures contracts and simply selling your holdings at the top before buying them back down. In addition, it will explain some of the risks of short selling cryptocurrencies, with the possibility of unlimited losses being the most substantial.

How to Short Sell Cryptocurrencies on Exchanges

Not all major crypto-exchanges allow you to short sell cryptocurrencies using margin, which allows you to borrow a cryptocurrency to sell it before buying it back later (to return it). However, here are some of the main exchanges that allow you to sell cryptocurrencies short:

  • Binance

  • kraken

  • Huobi

  • KuCoin

Examining how to short sell cryptocurrencies (using margin) on all these exchanges is beyond the scope of this article. However, we will look at the process of shorting BTC on both Binance and Kraken, in order to provide an example of how it usually works.

With Binance, users will first need to open a margin account. Then they should do the following:

  • Transfer collateral from your spot account to your margin account. For example, with the 3x margin offered by Binance, depositing $10,000 (or 10,000 BUSD) your margin account is worth $30,000 (or 30,000 BUSD).

  • On the BTC/
    USD (or BTC/BUSD) trading page, choose Limit Order and select the Cross 3x tab. Then, under Sell BTC, click Loan.

  • Then, select the amount of BTC you wish to borrow by entering the equivalent price. Then click BTC Selling Margin.

  • Assuming BTC’s price is $10,000, a margin account worth $30,000 would allow you to borrow – and sell – two bitcoins. You wouldn’t be able to borrow more (e.g. three bitcoins), because $10,000 must be kept as collateral.

  • After selling two bitcoins, you would have an extra $20,000 in your account. However, you should return two BTC later, so hopefully the price of bitcoin will quickly drop to a point where you could buy 2 BTC, return it, and have a good advanced profit.

  • To do this, click on the Refund tab under Buy BTC. Set the price and amount (e.g. 2 BTC), then click Buy BTC Margin. This way you will close your short position and hopefully make a profit.

These are the fundamentals of how short selling works on Binance. However, you need to keep in mind that the exchange will charge a handling fee and interest, with bitcoin having a daily interest fee of 0.02% (equivalent to 7.3% per year). Therefore, additional costs must be taken into account when short selling cryptocurrencies on margin.

With Kraken, you can do the following to short sell a cryptocurrency (see also Kraken’s support pages for more information):

  • Sign in to your account and click the Trade tab. Once in Trade, choose the pair you want to go short with (e.g. BTC/USD) and then click on the Kraken terminal icon (looks like a chart) in the upper right corner.

  • Once in the Kraken terminal, swipe to the right, to the trading module. At first, this module will probably be disabled – click Connect to enable it. Then, choose Sell, Limit, and then set leverage. Also, specify how much BTC you want to borrow (and sell) and at what price, then click Review and Sell.

  • After clicking Review and Sell, your order will have been placed. It may take a minute or two for the order to be fulfilled by the market, but once it has, you will receive the proceeds of the sale and be obliged to close the short position within 365 days.

  • To close a short position on Kraken, you have one of two options: simply deposit BTC into your Kraken account or simply buy (on Kraken) the amount of BTC you borrowed.

Margin calls, liquidations and risks

In a bear (or overheated) market, you may be forgiven for assuming that prices are almost guaranteed to fall. However, while the cryptocurrency market is notoriously volatile, this volatility also means that it can increase dramatically from time to time. This creates a huge risk for short sellers.

When selling short, whether on Kraken or any other platform, you need to be careful about margin calls. Basically, your collateral must maintain a value proportionate (called a “margin level”) to the price of the cryptocurrencies you are selling. So, if the price of a shorted cryptocurrency rises enough, you will need to deposit more funds as collateral to maintain your position. If you don’t, the exchange will liquidate your position, which means you’ll lose your collateral.

In other words, shorting can be very expensive if things don’t go your way. In fact, losses when you go short a potentially unlimited, as the cryptocurrency that you short has no limit on how high its price might rise. So make sure you feel confident that it will sink further before short-circuiting it.

Different ways to short sell cryptocurrencies: futures and sell your holdings

Another common way to short sell cryptocurrency is to sell futures contracts. Through a futures contract, for example, you can agree to sell bitcoins at $10,000. If it falls below $10,000 at the time the contract is concluded, you will make a profit.

Various exchanges offer futures trading. Here are some of the most important:

  • Binance

  • kraken

  • Bitfinex

  • BitMEX

  • Bybit

As with margin short selling, futures contracts will also require maintenance fees if they were entered into using leverage. Such contracts mostly have fixed expiration dates (i.e. dates on which they must be settled), although Binances offers perpetual futures contracts, which continue indefinitely, until the contract holder wants to close it.

Similar to selling futures contracts is buying put options. These represent the option – but not the obligation (as with futures) – to sell a particular cryptocurrency on or off a particular date. Again, if you think the price of a coin is going to fall, they are another way to short sell it and potentially make a profit.

Finally, if you already own a cryptocurrency, you can indirectly short sell it by selling it at a higher price and buying it back after it goes down. Although technically not short selling, this method can actually be profitable, particularly if you think that the cryptocurrency in question will rise again after reaching the bottom of its decline.

And speaking of declines, bitcoin and the broader cryptocurrency market continue to fall as we write these words. So while short selling may have its risks, it may be the only game in town for the time being.

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