Shorting crypto is what happens when investors buy a cryptocurrency and sell it at the current market price in anticipation of the price going down. They will then buy back the crypto to repay the loan when the price drops and profit from the difference between the sell and buy price.
What is a short (short sale)?
Short selling, which is “short selling” in English and used as “opening short” by users, is a method that investors use to protect themselves from the fluctuating effects of crypto assets or to reduce the risk of holding a long position.
Short selling is a trading methodology that uses leverage (usually borrowed assets like cryptocurrencies) to allow traders to make profits while prices are falling.
A person who shorts a cryptocurrency makes a claim that prices will fall. When the sale is made, it tries to profit from the price difference.
Short selling is an advanced trading tactic and involves more risk than the traditional low-buy and high-sell method. However, if done right, it will yield much larger returns compared to non-leveraged methods.
How does short selling work?
In short selling, there are 3 main items:
- Investor (Borrower):short-circuiting person
- Broker (Lender):party selling the asset
- Buyer:The person who buys the asset from the investor in the stock market
The investor first borrows an asset from the Broker at the current market price and undertakes to return the asset at a later date.
The investor then immediately sells this asset to the buyer.
When it is time to return the asset to the Broker, the investor buys it back on the exchange (also known as short-term) and returns it to the broker.
If the price has fallen from the time the investor first borrows the asset to when he returns it, the investor takes the difference into his wallet and makes a profit.
What is a short position?
In trading language, taking a short position simply means selling an asset that you do not currently own.
Short selling crypto takes the traditional concept of “buy low, sell high” and reverses it: “sell high, buy low.”
Investors keep crypto short for two main reasons:
- To increase their exposure to an investment
- To hedge against risk from a long position
Shorting crypto using leverage increases your exposure to an investment.
There are different levels of leverage you can use to increase your exposure. 2x, 3x, 5x and 10x leverages are common.
This means that if you use 2x leverage, your profits will be doubled for every percentage increase in the asset’s price. Similarly, your losses are doubled for every percentage drop.
Let’s say you want to short 100 WETH with 10x leverage and you open a short position at $191.99.
This means you only need $19,919.9 to make a $199,199 trade.
How is short selling done?
To short crypto via margin, you can follow the steps below:
Step 1: Create a Margin Account
Most of the popular and major cryptocurrency exchanges like Binance and KuCoin allow you to create a margin account.
Step 2: Choose Leverage
Determine the amount you want to remove and decide on an appropriate leverage. The higher the leverage, the greater the risk. So, if you are just starting out, you can try with smaller amounts.
Step 3: Deposit
Margin Then deposit assets into your margin account to act as collateral. These assets belong to you but are held by the broker to ensure that you can redeem the borrowed assets when closing your position.
Step 4: Buy Cryptocurrency
You can borrow the cryptocurrency you want to short-circuit from the Broker. How much you can borrow depends on your margin and the borrowing limits of the particular cryptocurrency.
Typically, highly liquid cryptocurrencies have higher borrowing limits.
Here you have to enter the price you want to borrow (this will be the current price of the asset) and how many tokens or tokens you want to buy at that price.
Suppose the current price of 1 WETH is $2,000 and you want to borrow 10 WETH. You will enter “2000” in the price field and “10” in the quantity field.
You will now have $20,000 worth of WETH in your account.
