Going Short on Bitcoin and Cryptocurrencies

Those who think Bitcoin or an other cryptocurrency will go down, or want to hedge against a “long” position, can open a “short” position. Below we explain how to short Bitcoin and other cryptos.

First, let’s quickly describe what shorting is and then we will move onto how to short ETH, BTC, ETC, etc (TLDR; use Kraken, Poloniex, Bitfinex, or CBOE and CME futures).

TIP: Going to cash is the equivalent of shorting Bitcoin using Bitcoin at 1x, but without the fees. Meanwhile, shorting Bitcoin at 1x with Bitcoin is essentially the same as being in cash, but with fees. That is worth keeping in mind on exchanges that don’t deal in cash or in situations where you can’t short Bitcoin.

TIP: Check out BTCUSDSHORTS (short interest on Bitfinex) before you short crypto. If shorts are at a high (for example in the chart below), you might want to rethink shorting. If shorts are at a recent low and Bitcoin’s price is high, then think about what that means. Shorting adds another layer of complexity to crypto, navigate shorting carefully (be it shorting as a hedge or shorting for speculation).

What is Shorting?

In simple terms, “shorting” is just betting that an asset will go down. Conversely, “going long” is betting an asset will go up.

Generally there are a number of different ways to go short including options, margin trading, futures contracts, short selling actual coins, and more.

The Good News and The Bad News on Shorting Crypto

The bad news on shorting crypto is there are very few ways for an upstanding US citizen who isn’t an accredited investor to short cryptos in some states and the number of coins one can short is limited.

While Kraken, Poloniex, and Bitfinex will be viable options for those in most states, in a few states using CBOE Bitcoin futures or CME Bitcoin futures to short Bitcoin might be your only options. That means in some states you will end up ONLY being able to short Bitcoin via the CBOE and CME cash settled contracts.

To add to that bad news, there are actually only a handful of brokers who will let you access Bitcoin futures (including E*Trade and TD Ameritrade, but excluding many major brokers).

Meanwhile, even with Kraken, Poloniex, and Bitfinex, your options are limited to the coins they allow shorting on (i.e., you can’t short every crypto).

The good news in all that bad news is this however, 1. anyone can open an account with one of the above brokers, and 2. even if your options for cryptos you want to short are limited, all cryptos tends to follow each other (meaning at most times shorting Bitcoin, Ethereum, or Ripple will have the same affect as shorting another token).

With that covered, let’s move onto all the different options a person has, including those who don’t live in the U.S., are accredited, or who like to live dangerously.

A List of Different Ways to Short Bitcoin and Other Cryptos

Margin Trading and Leveraged Short Selling: A few major exchanges including Kraken will allow you to short sell Bitcoin on margin either using leverage or not without being accredited. Here you are borrowing a given crypto at the current market price and selling it, and then you are buying it back later (hopefully at a lower price) to cover your position. This costs a fee and is subject to borrowing limits. You can do this on Kraken under advanced settings by selecting sell and then settle position (see here) and on Poloniex, which are both U.S. exchanges that generally comply with the law in most states, and on Bitfinex, which uses Tether and operates outside of the U.S. See: Kraken short selling and Poloniex short selling.

Options on Bitcoin Futures Contracts on the Stock Market: Anyone in any state can buy CBOE Bitcoin futures contracts or CME Bitcoin futures contracts. To short a futures contract you have to buy a call (option to buy) or put (option to sell) options on that contract. You do this through your broker and can use leverage. See: Call and put options on futures contracts.

Futures Contracts on Bitmex: Your last real option for shorting crypto, Bitmex, lives in a grey area. U.S. citizens can’t technically use Bitmex, but many do anyway using a VPN. Bitmex offers highly leveraged short contracts settled in BTC. All you do is pick the contract type and leverage, fund it, and hit go. See: trading on BitMEX.

Some Advice on Shorting Crypto

Hedging and Using Stops Vs. Borrowing Money to go to the Casino. Shorting crypto with leverage can be a lot like borrowing money to go to the casino when done for speculation and not as a hedge. It can make a ton of sense to use leverage on a small dollar amount to hedge against a long position with stops set. However, if you are just speculating without stops on high leverage (and especially if you keep funding your position to keep it from closing instead of using stops), you run a real risk of getting liquidated. If you don’t understand the risks of liquidation, you are likely not ready to short Bitcoin on margin. Learn more about margin trading.

Most cryptos track each other. In most cases you can short or long the top cryptos and use them as a proxy for the whole market. If the market is going down, then ETH, XRP, and BTC (for example) are probably going down and at least one is likely taking a hit as hard as any other crypto. Likewise, if the market is up, then they are probably all going up and in proportion with other cryptos. So in most cases you won’t need to short every crypto, you can just use one of the top coins as a proxy. Since you won’t have the choice to short many cryptos in many cases, this is useful to know. That said, each coin is its own thing, so DYOR.

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"How to Short Bitcoin and Other Cryptocurrencies" contains information about the following Cryptocurrencies:

Bitcoin (BTC), Ethereum (ETH), Ethereum Classic (ETC), Stable Coins