How to Short Crypto Step by Step: From Bitcoin to Dogecoin
C.J. Reichel & Justin Nugent
This article was last updated on 10/25/2022.
Many crypto traders are only familiar with buying or going long crypto, but in many cases, short selling fundamentally weak assets can be just as advantageous. Additionally, short selling offers many benefits for crypto traders including hedging and creating delta neutral strategies. In the guide below, we’ll detail everything you need to know about how to short crypto, from risks and strategies all the way to setting up your first trade. In most of the examples below, we’ll be using a short Bitcoin trade as our example. However, using the exchange and methods in this guide, you can short Doge, short Ethereum, and a broad spectrum of other cryptocurrencies. First, let’s talk about the risks of shorting crypto (and how you can mitigate them).
Understanding Exchange Risk
Kucoin.com is one of the best places to short crypto assets while trading in the United States. However, this does not come without risk. Kucoin is a non-KYC exchange based in Singapore, meaning the exchange is technically offshore and doesn’t know your identity. All you need to open an account is an email address. So it’s important to understand the risks of trading in a non-KYC exchange — and of short selling crypto in general.
Risks of Short Selling Crypto
Knowledge Check: What does it mean to short sell crypto? Short selling crypto: The sale of a cryptocurrency that you do not already own. Crypto short sellers are bearish on the security that they’re short selling, expecting the price of the crypto to fall so that they can buy it back for less money.
For example, you decide to short sell Bitcoin at the $20,000 level. You don’t own any Bitcoin, but with the help of margin, your broker allows you to sell it anyway with the agreement that you will eventually buy it back. The price of Bitcoin drops to $19,000, you buy-to-close your short Bitcoin position, and the trade is over.
Of course, short selling crypto won’t always work out in your favor. In these cases, it’s important to know the risks. When you’re long crypto, you are trading with defined risk. That means you can only lose what you put in. However, when short selling crypto, you must rely on margin. And where there is margin, there is the risk of a margin call.
What is a Crypto Margin Call?
To understand what a margin call is, how it works, and how to avoid it, imagine the example from above. You decide to short sell Bitcoin at the $20,000 level. Suddenly, a country decides to make Bitcoin legal tender. As a large nation buys the security hand-over-fist, the market value of Bitcoin soars — and so does the debt ratio of your account.
If the debt ratio (the amount of margin you’re borrowing to make the short sell bitcoin relative to your overall account value) goes too high, your exchange may issue a margin call, leaving you with two options:
- Add more money to your account, decreasing your debt ratio
- Liquidate your positions at a loss
The margin call isn’t meant to be malicious. It’s a risk management strategy utilized by brokerages to prevent catastrophic losses. For instance, imagine the situation above, but with no margin calls. You short sell Bitcoin for $20,000. Bitcoin rallies to $40,000, then to $60,000, then to $100,000.
Your short sale had a maximum credit of $20,000 — and now you need to buy it back at its market value, which is $100,000. You’re in the hole $80,000. If you don’t have that money, and you can’t pay it back, then you aren’t the only one who’s in trouble — your brokerage is too. That’s why margin calls are a must-use for brokerages, and a must-know for short sellers.
How to Manage Risk When Short Selling Crypto
This isn’t meant to scare you away from using margin. By understanding the risks of margin, you can understand how to mitigate those risks — and there are plenty of strategies that crypto short sellers can use to do that.
Quick tips to manage risk:
- Know your liquidation price. As we discussed above, when a trade goes too far against you, you run the risk of getting margin called (and subsequently liquidated). Use a leverage calculator before placing a trade to determine exactly where the danger zone is.
- Have a plan for every trade. One thing that a disciplined crypto trader always has is a plan. That means knowing exactly where you plan to take profit, and knowing exactly where you plan to cut the trade. The leverage calculator we discussed above can be helpful in planning for unintended consequences. As a whole, trading with a plan allows you to avoid emotion.
- Be vigilant of market moving news. You don’t have to keep your eyes glued to the screen, or buy a 6-monitor set-up — but it pays to know what’s going on. For instance, when Terra imploded, the implications reached far beyond the Terra ecosystem.
While there are many nuanced tactics that crypto traders use to manage risk on short sale trades, these three simple strategies can help you avoid catastrophe and protect profits.
In short: Though it isn’t without risk, margin is a powerful tool that can provide crypto traders an outlet to surpass their profit potential.
Now that you understand the potential pitfalls and risks of shorting crypto, let’s get into the good stuff.
Shorting Bitcoin Via Perpetual Futures Market
So you’re bearish Bitcoin and you want to short it? There are a couple of ways to short Bitcoin on Kucoin. The easiest way to short Bitcoin on Kucoin is by using the perpetual futures market. First, fund your main account by depositing USDT into Kucoin. Once your main account is funded with USDT, transfer funds from the main account to the futures account. Once there’s USDT in the futures account, select the leverage and the amount of capital you want to allocate to the particular trade. It’s very important to use the leverage calculator in the top right corner of the futures page before placing the trade.
Select the calculator icon in the top right corner to understand your risk before placing a trade.
After selecting the icon, the leverage calculator will appear. Select ‘liquidation price’ at the top and slide the leverage to whichever amount you want to use. The higher the leverage, the closer the liquidation price will be to your entry. Once you start the calculation, Kucoin will give you an estimate of what the liquidation price is before you enter a trade. If the price goes above your liquidation price while in a short position, your entire order will be liquidated and result in a 100% loss of the position.
When closing the short position, select ‘limit close’ and select the price you want to close the position at.
Shorting Bitcoin Via Cross Margin
Shorting via the futures market is probably the easiest and most straightforward way to short Bitcoin, however some assets don’t have perpetual futures so the only way to short them is through Kucoin’s cross margin market. Cross margin requires a few more manual steps when compared to the futures market, but the process is easy once you see how it works.
- First, transfer USDT to your cross margin account. By default, Kucoin cross margin is set at 5x, so if you deposit 10 USDT into your cross margin account, it should appear you have 50 USDT in your account.
- Next, select the asset pair you want to short.
- Then, select borrow
After selecting ‘borrow’, Kucoin will display this window asking whether you want to margin long or short. Select ‘Short’.
Remember, Kucoin lists margin at 5x by default, selecting 100% will use the max available leverage and your liquidation price will be closer to the mark price. Selecting a lower level of 25% or 50% will decrease your overall debt ratio to make the position less risky.
After successfully borrowing Bitcoin from the margin market, you have to manually sell it. Once you sell the BTC or crypto for USDT you have entered into a short Bitcoin position.
You now have USDT, yet you only owe Kucoin the number of coins you borrowed. Once you want to close the short margin position, buy back the amount of coins you borrowed (hopefully at a cheaper price), and select the ‘repay’ button right next to the borrow button.
You’ll be able to pay back the crypto you borrowed and if the price of the asset is lower than when you borrowed it, you keep the difference which is your profit for a successful short trade.
How to Short Sell Crypto Like a Professional
We know, it’s a lot to take in. The crypto market never stops, and outside of knowing how to short crypto, you also need a well-refined knowledge of technical analysis and the crypto market as a whole to know where and when to short crypto. Building that base of knowledge takes time, practice, dedication — and will probably come with a few stumbles. But there is a way to skip the hassle, and get straight to trading like a professional.
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