How to Buy Short on Crypto and How It Can Benefit You

Cryptocurrency markets are known for their volatility, which can present both risks and opportunities for savvy investors. One way to potentially profit from falling crypto prices is by shorting, or betting against the market. In this guide, we’ll explain how to buy short on crypto, how it can benefit you, and provide historical examples of coins that could have been successfully shorted.

Understanding Short Selling in Cryptocurrency

What is short selling?

Short selling is an investment strategy that involves borrowing an asset, selling it at the current market price, and later buying it back at a lower price to return to the lender. The profit comes from the difference between the selling price and the repurchasing price, minus any fees or interest paid on the borrowed asset.

How does short selling work in crypto?

Short selling in the crypto market follows the same principles as in traditional markets, but with some differences in the available instruments and platforms. Investors can short cryptocurrencies using margin trading, derivatives, or by short-selling specific tokens designed for this purpose.

How to Buy Short on Crypto

Margin trading

Margin trading allows you to borrow funds from a crypto exchange or broker to open a short position. When shorting with margin, you sell the borrowed cryptocurrency and later repurchase it at a lower price to return to the lender. Keep in mind that margin trading can amplify both gains and losses, making it a high-risk strategy.

Derivatives: Futures and options

Futures and options are financial instruments that derive their value from an underlying asset, such as a cryptocurrency. Shorting crypto using futures involves selling a contract that obligates you to sell the underlying asset at a predetermined price on a specific date. Options, on the other hand, give you the right, but not the obligation, to sell the underlying asset at a predetermined price before the contract expires.

Short-selling specific tokens

Some tokens, such as inverse or short tokens, are designed to inversely track the performance of a particular cryptocurrency. By buying these tokens, you can indirectly short the underlying asset without borrowing or margin trading.

Benefits of Short Selling Crypto

1. Profit from falling markets: Short selling allows investors to potentially profit during market downturns or when they believe a specific cryptocurrency is overvalued.
2. Diversification: Incorporating short selling strategies can help diversify your investment portfolio, reducing the overall risk.
3. Hedging: Short selling can act as a hedge against long positions, protecting your investments during periods of market uncertainty.Short selling can be a valuable strategy for investors looking to capitalize on falling crypto markets, hedge their long positions, or diversify their portfolios. By understanding how to buy short on crypto and the various instruments available, you can better navigate the volatile world of cryptocurrency investing. Keep in mind that short selling comes with its own set of risks and should be approached with caution, especially for those new to the crypto market.As with any investment strategy, it’s essential to conduct thorough research, stay informed about market trends, and carefully consider your risk tolerance before entering a short position. With a solid understanding of the principles and mechanics of short selling, you can take advantage of the opportunities presented by the ever-evolving world of cryptocurrencies.

Historical Examples of Coins That Could Have Benefited from Shorting

Bitcoin (BTC) in 2017-2018: After reaching an all-time high of nearly $20,000 in December 2017, Bitcoin experienced a significant decline, dropping to around $3,200 by December 2018. Investors who shorted Bitcoin during this period could have profited from the downturn.

Ethereum (ETH) in 2018: Similar to Bitcoin, Ethereum reached its peak in January 2018 at around $1,400 before falling to approximately $80 by December 2018. Shorting Ethereum during this period would have been a potentially profitable move.

Ripple (XRP) in 2018: Ripple’s XRP saw a rapid increase in value in late 2017 and early 2018, reaching a peak of around $3.84 in January 2018. However, by the end of 2018, XRP had dropped to around $0.36. Investors who shorted XRP during this time could have capitalized on the coin’s sharp decline.