How to Short Crypto: Four Ways to Capitalize off Market Downturns
The crypto markets have been in a freefall since hitting highs in late 2021. And many folks think things are poised to continue to fall amidst the current crypto winter. Some crypto tycoons like Richard Heart (the guy behind Hex and PulseChain) think this correction could drag Bitcoin all the way back down to $11,000 a token. If that turns out to be true, knowing how to short crypto could be a very lucrative proposition. And we’re here to help.
Just a couple years ago, the idea of Bitcoin hitting $11,000 would be cause for celebration among crypto devotees. But for those that got in at the height of the recent crypto boom, it could feel catastrophic. Which is why we’re going to show you four ways to try and make up some of those losses should Bitcoin continue its downward trajectory.
How to Short Crypto No. 1: Margin Trading
Crypto purists may not be too enthusiastic about centralized exchanges. But crypto’s growing popularity made it a necessary evil to draw in more folks. Anyone that’s stumbled through the annoying process of buying crypto on decentralized exchanges should get it. Plus, they made it easier than ever to trade fiat currency for digital coins.
But in addition to simplicity, most centralized exchanges allow for margin trading. Now typically, margin trading is done to maximize returns on upward movement. However, some exchanges like Kraken and Binance allow folks to borrow tokens outright. From here, folks can then sell those tokens right back on the market.
Eventually, the brokerage is going to want their tokens back though. If the tokens continue to go down in value, that’s not a big deal. You just buy them at the (hopefully) lower price. Then once you return them, you can simply pocket the difference. When it comes to learning how to short crypto, this is probably the easiest. And it doesn’t require signing up for new accounts with another service. You can learn more about margin trading here.
Short Strategy No. 2: Futures Markets
When Bitcoin and its crypto brethren went big in 2017, it grew so popular that a futures market was built around some of the larger tokens. These days, the Chicago Mercantile Exchange (CME) allows folks to short crypto. Here’s how it works…
To short crypto, you essentially sell a futures contract. This is a bet that the price will go down in the future. Here, someone buys the contract from you for the going price of a token. Then when they demand their cryptocurrency contract filled by the seller, he or she would simply buy the tokens at the lower price and fulfill their end of the obligation, pocketing the difference.
These days, it’s not just the CME that offers derivatives trading. Popular exchanges like Kraken, eToro and even TD Ameritrade offer ways to trade futures contracts now. In fact, this might be an even easier way to learn how to short crypto for folks that are unfamiliar with some of the popular crypto exchanges. And if you’d like to learn more about futures trading, just follow this link.
The Big (Crypto) Short No. 3: Inverse ETFs
Those familiar with the stock market should know there’s an ETF for seemingly everything. Betting inflation will continue to rise? There are a whole bunch of them to invest in. Think space travel stocks are about to see a boon in popularity? Look no further than the Procure Space ETF (Nasdaq: UFO). So naturally, there are several of them based on profiting from Bitcoin’s breakdown.
One of the first inverse crypto ETFs to hit the market was BetaPro Inverse Bitcoin ETF, which is traded on the Canadian stock exchange. Since then, the ProShares Short Bitcoin Strategy ETF (NYSE: BITI) has been launched here in the U.S. And there are likely more to follow soon.
And now that you’ve learned how to short crypto the three easiest ways, we’ll close out with one with a bit more of a learning curve…
Short Play No. 4: Prediction Markets
You’re probably aware that you can go to the FanDuel website or pop open the Caesars Sportsbook app on your phone to bet on sports. If you want to try and predict who’s gonna win the Superbowl, the World Series or the World Cup, it’s that simple. Guess right and you can be handsomely rewarded. Well, there’s a similar process for betting on which direction crypto will go.
These prediction markets might fall more in favor with those looking for a pure crypto play too. There are several decentralized prediction markets out there to choose from. Gnosis, for instance, is a platform for prediction market applications on the Ethereum blockchain. PlotX is a cross-chain prediction market protocol. This one makes it so users can make crypto price predictions in hourly, daily or weekly timeframes.
Then there’s Polymarket. This is an outlet for betting on a wide variety of hot topics. Want to make a wager that you know how long Vladimir Putin will stay in power? How about whether Jack Dorsey returning as CEO of Twitter (NYSE: TWTR)? The list of things you can bet on at the Polymarket website is a long one. And naturally, there are all sorts of crypto-related ones.
Here you can bet whether Celsius Network will announce its bankruptcy by July 13? Do you think Ethereum (ETH) will be above $1,200 on July 1? So far, the yes votes are winning. So a bet that it won’t could lead to a tidy payout.
So if you came here wondering how to short crypto, now you’ve got four easy ways to go about it. That being said, we do have some advice…
The Bottom Line on How to Short Crypto
Predicting which way the markets are going to go at any given time is nearly impossible. And that’s doubly true when it comes to cryptocurrencies. At least in the stock market investors have access to a wide array of fundamental information to make a more educated bet. But we don’t quite have the same thing when it comes to crypto.
Sure, we can read the whitepapers, look at trading volume and seemingly follow the influx or efflux of cash toward a given token. But shorting the crypto markets comes with a fair share of risk. The crypto markets are extremely volatile. Sudden increases in price can happen at a moment’s notice.
So just because you know how to short crypto, doesn’t necessarily mean you should. And even if you think you’ve got a hot tip that’s telling you which way crypto prices are going, remember, don’t bet more than you can comfortably lose. Short positions can cost investors a lot of money. They’ve even been responsible closing down some hedge funds. So be careful out there and good luck.
About Matthew Makowski
Matthew Makowski is a senior research analyst and writer at Investment U. He has been studying and writing about the markets for 20 years. Equally comfortable identifying value stocks as he is discounts in the crypto markets, Matthew began mining Bitcoin in 2011 and has since honed his focus on the cryptocurrency markets as a whole. He is a graduate of Rutgers University and lives in Colorado with his dogs Dorito and Pretzel.