Can you short crypto?

Just as you can short stocks and other assets, you can short crypto. Given how unpredictable the crypto market can be at times, some traders see shorting as a way to gain profits when the market takes a downturn, not just when things are going well. But, just as with any trade, that opportunity brings risk. If the market moves against you, the losses can pile up fast. In other words, shorting crypto, or taking a short position, means betting that the price of a given token is going to dip. 

In this article, we explore what crypto shorting is, why traders might choose to short crypto, and offer an example of gains and losses of a potential short position. 

What is crypto shorting?

To short crypto means to bet against the market. It involves borrowing a cryptocurrency and selling it at the current price, with the goal of buying it back later at a lower price. If timed correctly, shorting can be highly profitable for traders who understand market trends. But it is also imperative to understand the risks involved in shorting, because unlike traditional buying, or taking a long position, there is no limit to how much money you can lose. 

Crypto shorting is typically done through margin trading or derivatives like futures contracts, which allow traders to borrow and sell assets they don’t own. These tools can amplify gains and losses, making them popular among experienced traders, but rather risky for beginners. Platforms that offer shorting often require collateral and may liquidate a trader’s position automatically if the market moves against them. 

Why would traders short crypto?

Traders tend to short crypto when they believe the price of a cryptocurrency is likely to decline. In a market as unpredictable as crypto, price swings are often sharp and sudden, which offers traders the potential for high returns if a short is timed well. The ability to trade on margins makes shorting even more appealing to some as it allows traders to open larger positions with only a fraction of the funds. This can amplify profits, but it also comes with increased risk, especially in a market with high levels of volatility.

Another key motive for traders to short crypto is hedging. Some traders who hold long positions (for example, Bitcoin hodlers) may open a short position as a way of protecting themselves should the price of Bitcoin drop. This strategy allows them to offset any potential losses on their primary holdings. When market conditions look particularly uncertain or bearish, hedging with shorts can be a sensible risk management strategy, rather than simply speculative, and helps to balance out pressure on their portfolio. 

How to short crypto

By way of example, Trader X believes Bitcoin has been overbought and expects a price drop sometime soon. They decide to short 1 BTC at the current market price of $82,519 using a margin trading platform. This means they borrow 1 BTC from the exchange and sell it immediately at $82,519, hoping to buy it back cheaper later. The following two scenarios depict what might happen if Bitcoin’s price drops or increase:

Profit scenario: As things stand, Trader X has sold 1 BTC, meaning they currently hold at least $82,519 in unrealized profit. A few days later, as they predicted, Bitcoin drops to $75,000. Trader X buys back their 1 BTC at a lower price of $75,000, and returns the original borrowed bitcoin to the trading platform. In this case, their overall profit is $7,519, minus any trading or borrowing fees.

Loss scenario: Once again, Trader X has sold their 1 BTC for $82,519. Now, however, instead of falling in price, the market begins to surge and Bitcoin rises to $88,000. To cut potential losses, Trader X decides to close the short position and buy back 1 BTC at the higher price. In the end, Trader X’s bet did not pay off and they ended up losing $5,481 on the short position, which could have been more if the price had kept rising.

Read our FAQs for information on Limitlex’s tools and order options. For more information on trading crypto, how to use Limitlex, or to open a trading account with us, visit www.limitlex.com.