Shorting Crypto: How To Short Crypto, Best Exchanges, Risks, & Examples

Andrew McDowell

• 4 min read
Shorting Crypto: How To Short Crypto, Best Exchanges, Risks, & Examples

Cryptocurrency markets offer opportunities to profit not only when prices rise, but also when they fall. We'll explore the fundamentals of shorting crypto—from the basic concept to advanced strategies, including the risks and potential rewards.

Table of Contents

  1. Can You Short Crypto?
  2. What Is Shorting Crypto?
  3. Best Exchanges for Shorting Crypto
    3.1 Gemini
    3.2 Kraken
    3.3 Bybit
  4. Long and Short Positions
  5. Why Would Someone Want To Short Crypto?
  6. How Much Money Can You Make Shorting Crypto?
  7. The Cost of Shorting Crypto
  8. Shorting Crypto Risks
  9. How To Short Crypto
    9.1 Shorting on Margin
    9.2 Shorting Through Futures
    9.3 Using CFDs
    9.4 Buying Leveraged Tokens
  10. What To Know Before You Short
  11. Frequently Asked Questions

Can You Short Crypto?

Yes. Much like in traditional financial markets, cryptocurrency can be shorted through various platforms and instruments. Traders profit when prices decline, but the high volatility and 24/7 trading environment require careful risk management.

What Is Shorting Crypto?

Shorting cryptocurrency is essentially betting that the asset's price will fall. You borrow crypto at today's price, sell it immediately, and later buy it back at a (hopefully) lower price to repay the loan. The difference—minus fees—represents your gain or loss.

Best Exchanges for Shorting Crypto

Below are three popular platforms offering shorting capabilities in 2024. Always verify geographic availability and regulatory compliance before signing up.

1. Gemini

  • Pros
    • Up to 100x leverage
    • Flexible collateral options
    • No expiration on trades
    • Strong security measures
  • Cons
    • Not available in US, UK, or EU
    • Lower leverage for large trades
    • Complex interface for beginners

Shorting Crypto on Gemini
Gemini Derivatives allows short selling using Bitcoin (BTC) and GUSD as collateral. They offer perpetual contracts without expiry and competitive maker-taker fees.

2. Kraken

  • Pros
    • Up to 5x leverage
    • Extensive customer support
    • Over 120 cryptocurrencies supported
    • Strong industry reputation
  • Cons
    • Not available in the US
    • Higher margin fees than some rivals
    • Has experienced security incidents historically

Shorting Crypto on Kraken
Kraken provides margin and futures trading options. Fees include maker-taker and position maintenance costs, so factor these into your profitability calculations.

3. Bybit

  • Pros
    • Up to 100x leverage
    • Advanced trading features
    • Competitive fee structure
    • High trading volume/liquidity
  • Cons
    • Not available in the US
    • Platform can be complex for newcomers
    • High leverage amplifies risk

Shorting Crypto on Bybit
Bybit offers perpetual futures and margin trading. Maker-taker fees reduce with higher trading volumes, appealing to more active or high-volume traders.

Long and Short Positions

  • Long Position: You profit if prices increase. Losses are limited to your initial investment.
  • Short Position: You profit if prices decrease. Potential losses can be unlimited if the market moves against you.

Why Would Someone Want To Short Crypto?

  • Market Hedging: Protect existing crypto holdings from price drops.
  • Portfolio Diversification: Add non-correlated or inverse-correlated strategies.
  • Profit from Market Declines: Earn returns in a bearish market.
  • Arbitrage Opportunities: Exploit price differences across exchanges.
  • Risk Management: Balance your long-term investment positions.

How Much Money Can You Make Shorting Crypto?

Short Example

  1. Sell 1 BTC at $30,000 (borrowed from the exchange).
  2. BTC's price drops to $20,000.
  3. Buy back 1 BTC for $20,000.
  4. Return the borrowed BTC.
  5. Profit = $10,000 minus fees and interest.

While gains can be substantial, losses can be unlimited if prices rise instead of fall.

The Cost of Shorting Crypto

Costs associated with short selling:

  • Trading Fees: Maker/taker fees.
  • Margin Interest: Charged for borrowing funds.
  • Platform Fees: Exchange-specific charges.
  • Withdrawal Fees: If you move funds off-platform.
  • Tax Implications: Capital gains/losses may apply.

Shorting Crypto Risks

  1. Unlimited Loss Potential: Unlike a long position, short losses can grow if the market rallies.
  2. High Volatility: Crypto's price swings intensify the risk.
  3. Margin Calls: You may need additional funds if prices move against you.
  4. Platform Risks: Security or liquidity issues on exchanges.
  5. Regulatory Uncertainty: Changing rules can affect the availability or legality of short selling.

How To Short Crypto

Here are the four most common methods to short cryptocurrency:

Shorting on Margin

  1. Deposit collateral into your exchange account.
  2. Borrow cryptocurrency from the exchange.
  3. Sell the borrowed crypto.
  4. Wait for the price to fall.
  5. Buy back at a lower price.
  6. Return the borrowed amount and keep the difference.

Think of it like borrowing a friend's collectible card you expect to lose value. You sell it now, buy it back cheaper later, and return it to your friend—pocketing the difference.

Shorting Through Futures

  • Agree to sell crypto at today's price on a future date.
  • If prices fall, you can buy cheaper crypto to meet your obligation.
  • The difference becomes your profit.
  • Often involves no physical crypto exchange.

Using CFDs

  • Contract for Difference (CFD): You speculate on price movements without owning the asset.
  • If prices drop, the other party pays you the difference; if they rise, you pay them.
  • Generally unavailable to US residents due to regulations.

Buying Leveraged Tokens

  • Inverse or short tokens automatically move opposite to the crypto's price.
  • Example: If Bitcoin drops 1%, a short token may rise 2-3%.
  • Easiest to set up but often comes with higher fees and decay over time.

What To Know Before You Short

  • Risk Tolerance: Understand the high stakes of short selling.
  • Capital: Only use funds you can afford to lose.
  • Market Knowledge: Crypto's 24/7 nature demands constant attention.
  • Time Commitment: Monitor your positions; set stop-loss orders.
  • Exit Strategy: Know your targets for profit-taking and your maximum acceptable loss.

Tips for Choosing an Exchange

  • Shorting methods offered (margin, futures, etc.).
  • Geographical restrictions and regulation.
  • Fee structure and potential hidden costs.
  • Security history and reputation.
  • Trading volume and liquidity for smooth order execution.

Frequently Asked Questions

Q: Can Crypto Be Shorted?
Yes. Methods include margin trading, futures, CFDs, and leveraged tokens. Each carries distinct risks and requirements.

Q: Can I Short on Coinbase?
Coinbase offers limited shorting capabilities via advanced trading—mostly futures—and availability depends on location and account eligibility.

Q: What Are the Most Common Ways to Short Bitcoin?

  • Margin trading on exchanges
  • Futures contracts
  • Inverse ETFs or leveraged tokens
  • Options trading (puts)
  • CFDs (outside the US)

Q: Is Shorting Crypto Illegal?
No, shorting cryptocurrency is legal in most places. Some methods, like CFDs, may be restricted based on regional regulations.

Q: Do You Have to Pay Taxes When Shorting Crypto?
Yes. Short-selling gains are typically taxable. Keep detailed records, and consult a tax professional to understand specific requirements.

Shorting crypto offers the potential for significant profits during market downturns, but it also entails greater risk. Always educate yourself, start small, and manage your risk with stop-loss orders and a well-defined exit strategy.