What is shorting on the stock market?

On the stock exchange, concepts such as long and short positions are used. They are indicated by long and short, respectively. Trading in long positions represents the purchase of an asset at a time when its price falls and then its sale at a higher cost.

Generally speaking, the stock market is constantly growing. Falls are observed during periods of price correction. But such situations are sometimes protracted. For example, price corrections tend to endure for long stretches of time during economic crises. In such situations some people opt to open short positions.

Shorting works like this: the trader, realizing that the value of an asset will soon fall, takes out a certain amount of securities from a broker. Then he sells them on an exchange, waiting for the price to drop to a specific point. Once the asset reaches the required minimum, the trader buys the asset and returns it to the broker. Earnings are obtained from the difference between the initial price and the final.

How to short Bitcoin or other cryptocurrencies

There are several ways of short selling cryptocurrency today: with derivatives, using CFDs or borrowing from an exchange.

Shorting carried out through derivatives:

  • A derivative contract is a financial contract where the price is determined by the underlying instrument;
  • For example, the best-selling cryptocurrency derivative is a contract that tracks the price of Bitcoin against the US dollar.

When you buy a derivative, it does not mean that you own the underlying asset. It just means that the price of the underlying asset affects your financial condition.

Using derivatives, traders can apply more advanced strategies than when buying a real asset. Derivatives allow traders to use leverage. In fact, leverage means that the profitability of a transaction can increase due to the use of borrowed funds. However, this also increases the risk.

Shorting with CFDs:

If you are a retail trader and don’t have an account with a broker that supports derivatives you can try to go short using online CFD services.

CFD stands for “contracts for difference” and they work the same way as derivatives but for retail traders. There you can bet that the price of Bitcoin will increase or decrease without buying it physically.

CFD is a leveraged tool so you can go long or short on cryptocurrency using margins. It means that traders only have to put down a percentage of the total amount of the trade in order to open a position. This allows traders to increase their returns if their bets pay off. But it also brings a lot of risk as losses are also magnified if the price moves in the opposite direction.

Shorting carried out through borrowing:

Some exchanges offer short-selling services. They act as brokers and let users borrow an actual asset and sell it on the market. Let’s illustrate how this works with an example:

1) You short sell 2 Bitcoins when the price is $8,000, meaning that you borrow them and sell for $16000 in total.

2) When the price of BTC falls to $6,500 you buy 2 Bitcoins again and sell them back to the service you borrowed from at 2*$6,500 = $13000.

3) Your total profit is $16000-$13000 = $3000.

What nuances I should know before shorting

Shorting is dangerous in that the period of use of the borrowed cryptocurrency is limited. There is no method to wait for a profitable rate to close the deal for as long as necessary. If the coin does not fall in price, then you will have to close the position without profit. And if the value of the asset goes up, then you still have to buy it back, paying the difference by yourself out of pocket.

All cryptocurrencies have the potential to unexpectedly fall. And they do, often. So traders looking at the situation rationally try to use that tendency to make a profit. We recommend remembering the following tips:

  • Shorting with insufficient experience in trading is a risky and generally bad idea. Especially in the case of unknown altcoins.
  • You should delay in dealing with shorts, otherwise you will slowly but surely lose money on the deal.
  • If you decide to go short, do it only when you have an educated anticipation of the rate falling.
  • Before going short, make sure that you understand the basics of the tactic and have studied the relevant instructions on exchanges.

Also, beginners should remember that there’s no guarantee that your trading will be safe and profitable. There is always a risk, doesn’t matter if you are shorting cryptocurrencies or playing long. In each case, it is important to adhere to certain rules to minimize risks:

  • Secure your portfolio and everything connected with it.
  • Distribute assets. Do not risk more than 10% of your deposit on one deal. It is important to keep calm and stay in control of your money.
  • Evaluate your risks correctly and do not rush into a transaction without considering the consequences.
  • Distribute capital. Try to smoothly increase the turnover of your trades, so that when a certain cryptocurrency crashes, you are protected.

The crypto trader would be wise to follow these four rules. Add to these postulates a knowledge of technical analysis, and the balance of the deposit will be even safer.

Where can I short-sell Bitcoin

There are many cryptocurrency exchanges and services on the web where you can short sell Bitcoin, as well as some altcoins.

Shorting with derivatives: 

The most popular places to short BTC with derivatives are the CBOE and CME platforms. These services allow you to trade with Bitcoin futures contracts, without having to buy the physical asset itself. To learn more about Bitcoin futures read our article.

Shorting using CFDs:

  • eToro – it is a trading platform for various assets and financial tools including cryptocurrencies. eToro offers Bitcoin Contracts for Difference where you can short sell BTC without owning the coin itself. You can use a demo account with $100,000 to practice your trading skills there.
  • AvaTrade – another trading platform. The key features of AvaTrade are its high leverage level (20:1) and lack of hidden fees. The platform is available in 14 languages and accepts fiat trading.
  • Plus500 – trading platform with CDFs for Bitcoin. Plus500 offers leverage of up to 1:30 for trading Cryptocurrencies like Bitcoin.

Shorting on cryptocurrency exchanges:

  • Bitfinex – This site is quite large in terms of trading for the BTC / USD pair. You can both go short and long with crypto here. The service is among the top five ranked cryptocurrency exchanges in the world. Margin trading is available on Bitfinex too.
  • BitMEX – This exchange is also among top rated in the industry. The trade turnover is more than one billion dollars there. The exchange gives a leverage of 1:100.
  • LedgerX – This cryptocurrency exchange is monitored by the SEC. It has been working since July 2017. It is a fairly reliable trading platform.

This article is not financial advice and not a recommendation to engage in the trading or buying/ selling of cryptocurrencies. This content is only for informational purposes. Please, note that the cryptocurrency market has a highly volatile nature and it involves significant risks. We strongly advise our readers to conduct their own independent research before engaging in any such activities.


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