Short
What Is a Short?
Shorting in crypto is a trading strategy that involves borrowing cryptocurrency from a broker or exchange and selling it on the open market with the expectation that the price will fall. The trader then buys back the cryptocurrency at a lower price and returns it to the lender, pocketing the difference as profit. It's called "short-selling" because the trader is looking to make a profit from the price decline. This strategy is used by traders to make money in a bear market as they can potentially make more money when the price of an asset is falling than when it’s rising.
How Does Short-Selling in Crypto Work?
To short-sell, a trader must find a broker or exchange offering margin trading and shorting. The trader then borrows the cryptocurrency and immediately sells it on the open market. When the price drops, they buy back the cryptocurrency at a lower price and return it to the lender, keeping the difference as profit.
For example, if a trader borrows Bitcoin at $10,000 and immediately sells it on the open market. If the price of Bitcoin then drops to $9,000, they can then buy back the Bitcoin and return it to the lender, keeping the $1,000 difference as profit. If the price of Bitcoin increases after they short, the trader would need to buy back the Bitcoin at a higher price and return it to the lender, which would result in a loss. This is why it’s important to be aware of the market conditions and to use stop-loss orders to limit losses in case the price moves against the trader.
Different Ways to Short Crypto
Futures Contracts: Futures contracts are one of the most popular ways to short crypto. Futures are derivatives that allow traders to speculate on the future price of a cryptocurrency without actually owning it.
Options Contracts: Options contracts are another type of derivative that allows traders to speculate on the future price of a cryptocurrency without actually owning it. If the price of the crypto falls below the agreed-upon price, the trader can close the contract and make a profit.
Margin Trading: Margin trading allows traders to borrow funds from a broker to trade with more capital than they have in their accounts. This can be used to open a larger position than the trader would normally be able to open and to take advantage of price movements in either direction.
