Understanding Shorting in Crypto
The trader aims to buy back the cryptocurrency at a lower price, return it to the lender, and profit from the price difference.
Short-selling allows traders to profit from falling prices in a bear market potentially.
How Does Short-Selling in Crypto Work?
To engage in short-selling, a trader must find a broker or exchange offering margin trading and shorting.
The trader borrows the cryptocurrency and immediately sells it on the market.
If the cryptocurrency’s price declines, the trader can repurchase it at a lower price, return it to the lender, and keep the profit.
Different Ways to Short Crypto
There are several methods to engage in short-selling crypto:
- Futures Contracts: Traders can use futures contracts, which are derivatives that allow speculation on the future price of a cryptocurrency without owning the underlying asset.
- Options Contracts: Another derivative instrument, options contracts, enable traders to speculate on the future price of a cryptocurrency without owning it. If the price falls below the agreed-upon price, the trader can close the contract and earn a profit.
- Margin Trading: Margin trading allows traders to borrow funds from a broker or exchange to trade with more capital than they have in their accounts. This enables traders to open larger positions and take advantage of price movements in either direction.
Each method has its own risk profile and requirements, and traders should thoroughly understand the mechanics and risks associated with each approach before engaging in short-selling.