Shorting Crypto 2023: How to Short Crypto, Best Exchanges, Risks, and Examples

Yes.

Crypto shorting most commonly happens by using “margin,” — which essentially means borrowing crypto. You then sell the crypto you have borrowed with the idea that you can pay the margin back by rebuying the crypto at a future time when the price will be lower (hence “shorting”).

• What is Shorting Crypto?

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  You can short crypto through any exchange that allows margin trading. Any cryptocurrencies that support margin trading can also be shorted. Depending on the margin requirements, you may be able to take larger short positions by taking on more margin — some cryptocurrency exchanges support margin positions leveraged upwards of 10x, so you can potentially take a massive short position with a small amount of upfront capital.

  It’s important to keep in mind that the more leverage you take on through margin, the more exposed you are to price changes in crypto. Every time you borrow cryptocurrency, you are liable for paying it back, and taking on significant leverage means that even small market moves can fully wipe out your collateral.

  Leveraged positions are calculated based on underlying collateral. The leverage multiple (such as 2x, 5x, 10x etc.) is in reference to the available collateral. For example, if you have $1,000 available for collateral, a 2x margin position would give you $2,000 of trading power, while a 5x margin position would give you $5,000. Most platforms lock up collateral funds while they are in use for margin trading, and they cannot be used or transferred off the platform.

  Most margin trades will also incur some fees for facilitating the transaction and funding the margin capital.

• Kraken
• Bybit
• Binance
• eToro

1. Kraken

Kraken is a cryptocurrency trading platform founded back in 2011 that is one of the main centralized exchanges on the market today. The platform supports over 120 cryptocurrencies and is known for their competitive fees through their Kraken Pro exchange which is available to anyone who signs up for the regular Kraken platform.

• Shorting Crypto on Kraken

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  Kraken provides margin and futures trading. For margin trading, the money that you borrow will then be paid back once you close your short position — hopefully for less than you borrowed, thereby making you a profit.

  The spot fees to open a margin position are the platform’s 0.16% for makers and 0.26% for takers + up to 0.02% to open a position and up to 0.02% per 4 hours in rollover fees to keep the position open.

  Kraken averages $500 million dollars in daily spot trading volume, so it definitely has the liquidity and platform to handle and execute trades. Additionally, the platform follows the highest international standards for its security, touting a ISO/IEC 27001:2013 certification. According to their documents, “95% of all deposits are kept in offline, air-gapped, geographically distributed cold storage.”

• How to Short Crypto on Kraken

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  Step 1: Head to https://www.kraken.com/ and log in or sign up.

  

  Step 2: Select Trade from the top menu of your dashboard, and you’ll be redirected to a trading interface.

  

  Step 3: Switch from Buy to Sell on the trading interface and select the amount of leverage for the Sell trade. Enter the amount you want to sell and click sell.

  

  The idea is to buy back the exact number of tokens Kraken borrowed for your leveraged sell trade at a lower price in the future, repay it, and pocket the profit.

2. Bybit

Bybit is a trading platform that supports a variety of advanced trading features. Angling as the go-to exchange for professionals and advanced traders, the platform provides shorting through several different methods that mostly focus on futures and derivatives markets.

• Shorting Crypto on Bybit

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  Bybit offers an incredible 100x leverage on their trades, which means that for every $1 you have, you can trade $100. The platform also offers Inverse Perpetuals, USDT Perpetuals, and Inverse futures for shorting.

  The Bybit platform supports a wide range of the most popular cryptocurrencies and has maker- -and-taker fees that are competitive compared to other exchanges. Different trading tiers provide lower fees based on exchange volume. Maker and taker fees on Bybit can be reduced to almost 0% if your trading volume is high enough.

• How to Short Crypto on Bybit

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  Step 1: Head to https://www.bybit.com/ and log in or sign up.

  

  Step 2: Select Trade > Margin trading from the top menu, choose the token you want to short, and you’ll be redirected to the trading interface.

  

  Step 3: You’ll get a prompt to enable margin trading if you haven’t done that before. Afterward, you’ll see two options on the trading interface, Long or Short. Enter the amount you want to short and click the Sell/Short button.

  

  Step 4: You’ll receive a prompt to confirm the trade. Click Sell/Short again to successfully open the short position.

  

3. Binance

Binance is the largest crypto exchange in the world by trading volume. As far as exchanges go, it has competitive fees, a large selection of cryptocurrencies, margin of up to 10x and the most trading volume of any crypto exchange out there.

• Shorting Crypto on Binance

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  Binance uses two types of margin lending to facilitate short positions. There is Cross Margin and Isolated Margin.

  • Cross Margin allows you to borrow funds to use across any trading pair on the platform. These funds are normally leveraged up to 3x and can be used to short any asset that’s supported by the Binance markets.
  • Isolated Margin allows borrowing of margin over 3x, but it can only be used on specific trading pairs. Each trading pair has a different margin amount that is allowed, and money borrowed through isolated margin can only be deployed to that particular market.

• How to Short Crypto on Binance

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  Step 1: Head to https://www.binance.com/ and Log In or Register.

  

  Step 2: Select Wallet > Margin from the top menu.

  

  Step 3: On your Margin wallet, click Transfer and search for USDT in the currency search bar. Enter the amount of USDT you want to transfer, and it’ll serve as your collateral.

  

  Step 4: Click Borrow in your margin wallet and search for the cryptocurrency you want to short, e.g., BTC. Type the amount you want to borrow and click Confirm Borrow.

  

  Step 5: Head to Trade > Spot from the top menu and sell the amount of tokens you borrowed. The idea is to sell them at a higher price and buy the same amount of tokens at a lower price to repay. Congrats! You’ve opened a short position.

  

4. eToro

eToro is a classic exchange that supports much more than just crypto trading. The platform features stocks, commodities, and currencies. They also put a heavy emphasis on social investing, and the platform provides a social feed that you can use to copy the trades of top portfolio performers.

• Shorting Crypto on eToro

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  eToro uses CFD trading to enable margin trading and shorting on its platform. According to their website, eToro’s CFD “offers traders and investors the opportunity to profit from price movements in the financial markets without owning the underlying instrument.”

  eToro’s unique CFD offering can be combined with their CopyTrader feature to copy the short trades of top performers on the platform. For those looking to experiment but not jump in with real money, the platform offers a $100,000 demo account with CFD enabled to play around with.

• How to Short Crypto on eToro

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  Step 1: Head to https://www.etoro.com/ and log in or sign up.

  

  Step 2: Head to Discover and select Crypto from the top menu of your dashboard.

  

  Step 3: Click on the crypto asset you want to short, e.g., ADA. Click Invest > Sell. From the drop-down menu, switch from Trade to Order.

  

  Step 5: Specify the rate at which you want to sell that token and the amount of tokens to sell, and click Set Order. This Sell order will open as a short-selling position and will increase in value as the asset's price goes down or decrease if the price goes up.

  

Long and Short Positions

When betting on the price movements of assets, there are two options: either betting that the price will go up — taking a long position, or betting that the price will go down — taking a short position.

• Why Would Someone Want to Short Crypto?

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  There are a number of reasons to short crypto, and many of them help to protect from unwanted portfolio losses.

  • Bet against a coin: This is the most common shorting scenario. Any time investors believe that a cryptocurrency is going to go down in price, they can make money by shorting it.
  • Hedge existing holdings: In investing, a “hedge” is when an investor makes a bet that’s the opposite of what they expect to happen. This is to protect (or “hedge”) against losses in the case that their prediction about the future is wrong. For example, if you believe ETH will go up by $10k over 6 months, you may buy a bunch of ETH and wait for it to appreciate, but you may also want to short some ETH in that time as a hedge, just in case you’re wrong.
  • Funding Rate Arbitrage: On exchanges that offer perpetual futures contracts, the price of the futures contract should be as close as possible to the price of the underlying asset. In order to encourage this constant price convergence, exchanges will offer a funding rate reward to traders that help close any gaps between the price of the option and the underlying asset. Traders can farm these fees by simultaneously opening a long and short position on the spot and futures markets. This strategy makes no money and takes no losses from the price movements of the assets but just nets the funding rate.

• How Much Money Can You Make Shorting Crypto?

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  Theoretically, you can make just as much money shorting crypto as you can make by going long. If you short and the market goes down by, say, $10,000, you would make just as much as you would have made if you took a long position and the market went up $10,000.

  There are some fees associated with shorting since you are normally borrowing crypto on margin, but they are usually minimal, and price moves of more than a few percentage points will make up for the fees.

A Short Example

Suppose that the current price of Bitcoin is $30,000, and you believe that it is going to go down. You can make a bet on this by shorting Bitcoin. To do this, you borrow some Bitcoin from an exchange and sell it on the open market. Let’s say you borrow 1 BTC and sell it for $30,000. Now you end up with $30,000 in your account, and you owe the exchange 1 BTC.

Some time later, your prediction comes true, and Bitcoin falls to $20,000. You take the $30,000 you earned from selling your borrowed Bitcoin and use it to buy back 1 BTC at this new $20,000 price. You now have $10,000 and 1 BTC. You return the 1 BTC back to the exchange, and your margin position is closed. In the end, you have netted $10,000 from shorting Bitcoin (minus platform fees and margin interest).

• The Cost of Shorting Crypto

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  Shorting crypto, like any other transaction on an exchange, usually comes with some costs and fees. Keep in mind that each platform charges different fees, so all of the below (except for taxes) will vary platform by platform.

  • Trading Fees: Every transaction on a crypto exchange incurs trading fees. For most crypto exchanges, these fees are separated into maker and taker fees (which just determine whether a trade helps to add liquidity to a market or is taking liquidity away). Maker and taker fees are usually different for spot markets — markets where you buy cryptocurrencies — and futures markets — markets where you just trade on the price of the cryptocurrencies without actually holding the asset itself.
  • Margin Fees: In addition to maker/taker fees, shorting will usually incur margin fees since you are borrowing crypto in order to short it. These fees normally revolve around a fluctuating daily rate which is recalculated every day depending on market conditions.
  • Other Platform Fees: Many platforms charge other fees after trades are executed. One of these common fees is a withdrawal fee which is incurred whenever you transfer money or crypto out of the platform. It’s important to also factor in these platform fees.
  • Taxes: Finally, if you profit from shorting crypto, you will be taxed on those realized gains.

Shorting crypto is certainly not without risk. While all crypto investing is dangerous due to the volatile nature of the markets, shorting is especially so. Here are a few important points to look out for when considering shorting crypto:

• Unlimited Downside: Unlike going long, when you’re taking a short position, you are exposing yourself to potentially unlimited downside. Suppose you buy BTC at $30,000 and hold it, hoping the price will go up — the worst that can happen is BTC can go to $0, therefore, your losses are capped. This is not the case with shorting. To illustrate this, suppose that someone shorted BTC back when it was at $100, and they still haven’t closed their margin position. So they borrowed 1 BTC and got $100 in return, but they still owe that 1 BTC even as the price of Bitcoin grows to $30,000+. Theoretically, the price can go 10x or 100x higher, and they will eventually be forced to pay whatever BTC is trading for in order to close their position — hence their exposure to unlimited downside. This risk can be mitigated by trading with a stop-loss instrument.
• Margin Risk: When you’re shorting crypto, you’re typically opening a margin position to borrow the BTC that you then sell. This can be risky if you opt to use more than 1x leverage. For example, if you short BTC using 5x leverage, you only need the market to gain 20% in value for you to lose your entire collateral. If you use 10x leverage, a 10% appreciation in the price of Bitcoin will wipe out your collateral and so on. Margin trading is extremely risky, and margin should be kept as low as possible to minimize risk.

While using margin is the most common method, there are a variety of ways to short crypto. Keep in mind that not all exchanges support each of these methods:

• Shorting on margin
• Shorting through futures
• Using CFDs
• Buying leveraged tokens

*Please Note: Due to strict financial regulations around trading on margin, many of the below platforms do not support shorting for US residents.

• Shorting on Margin

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  The most common method for shorting crypto is shorting on margin. This method involves borrowing a cryptocurrency (such as BTC) and selling it on the open market in return for cash. You then owe the cryptocurrency back to the exchange, with the idea being that if the price of the crypto crashes, you will be able to buy it back for less than they loaned it out to you for, thereby profiting in the process. In order to short on margin, you will need to deposit some initial funds — known as “posting margin” — to your account as a form of collateral.

  The margin you post does not always have to cover the full amount of your trade, it can also be a partial amount where you borrow the rest from the exchange you are trading on. Margin requirements for shorting vary by platform. Keep in mind that borrowing funds is always risky and exposes you to the volatility of crypto prices.

• Shorting Through Futures

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  Whereas trading on margin requires you to actually purchase and hold the crypto asset, shorting through a futures market allows you to just speculate on the price without actually holding the underlying asset. To short a crypto through futures, you can take the “sell” side of a futures contract — which obligates you to sell an asset at a given price at some point in the future.

  If the price of the asset does indeed decline over time, you’ll be able to purchase it for cheap and sell it for a premium when the futures contract expires. Shorting through futures also requires you to post margin — or have some initial funds in your account that ensure you have skin in the game with your trade.

  The posted margin does not have to cover your entire trade size, and you can often borrow the rest of the funds through the exchange you are trading on. Remember that trading on margin is risky and you could lose more than you intended if market conditions sour.

• Using CFDs

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  Platforms like eToro support crypto CFDs for traders looking to short crypto. A CFD (contract for differences) is an agreement that works like a simplified version of a futures contract. You enter into an agreement with a counterparty that you will compare the price of a crypto asset in the future to its current price.

  If you take the short side of a CFD, and the price of the crypto goes down, the counterparty will owe you money, and vice versa. This can all happen without any crypto actually exchanging hands. CFDs also require posting margin funds to your account in order to trade. Trading on margin is risky and you should only borrow funds to trade if you understand and accept the risks involved.

Buying Leveraged Tokens

Exchanges provide leveraged tokens that represent longs and shorts of various crypto assets. These tokens track the price of the underlying asset (such as BTC). If they are a long-leveraged token, their price will go up when the underlying asset goes up, if they are a short-leveraged token, they will go up when the underlying asset goes down. These can be thought of as buying an ETF of the underlying security that has a long or short mechanism built in.

When preparing to short crypto, it’s important to decide:

• How much crypto would you like to short?
• Do you want to use leverage?
• How long do you plan on having your short position open?
• Do you have a plan for what happens if the price of crypto keeps going up rather than down?
• Do you want to control the whole process yourself or use a set-it-and-forget-it option?

Tips For Choosing an Exchange

There are several factors to consider when picking an exchange. Many exchanges cater to different types of clients, and getting the best trade starts with knowing what to look for.

• What type of shorting method do you want to use?
  • Do you want to short using margin, through a futures market or CFD, or through a leveraged token? Not every platform provides each of these functions, so it’s important to take these into account when picking an exchange.
• What is your risk tolerance?
  • Margin trading and leveraged tokens often take on market leverage that is riskier than just regular shorting. These can have outsized returns, but they also magnify losses. Assess your personal risk tolerance when deciding what method to use.
• Fees
  • Some platforms are more fee-conscious than others. If getting the lowest fees is important to you, this is a factor worth keeping in mind as you browse different exchanges.

Crypto shorting is a viable strategy for making money during bear markets. It’s important to understand the risks associated with shorting, however, and to do your research to pick a platform that best suits you. When assessing your options remember to keep in mind platform fees, their supported shorting methods, and their supported cryptocurrencies.

• Can Crypto Be Shorted?

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  Yes. Just like any many other financial assets, crypto can be shorted through a variety of methods including margin trading, futures trading, and CFDs.

  
  

• Can I Short on Coinbase?

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  Coinbase does not currently support shorting crypto.

• What Are Some Of The Most Common Ways to Short Bitcoin?

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  The most common way to short Bitcoin is to take out margin and repay it by buying Bitcoin at a lower price in the future.

  Some other ways to short Bitcoin are:

  • Futures
  • CFDs
  • Leveraged Tokens

• Is Shorting Crypto Illegal?

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  No, shorting crypto is not illegal. Shorting is a legitimate part of a working and efficient market and takes place in the regular stock markets every day, just as it does in crypto.

  
  

• Do You Have to Pay Taxes When Shorting Crypto?

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  Shorting crypto works much like going long crypto when it comes to taxes. If you profit from your shorting, your earnings are subject to capital gains tax.