A bull run can take years to come, and every rally can lead to a prolonged crypto winter. The solution? Learn how to short cryptocurrencies.
In this article, I will share a solid strategy for shorting Bitcoin or other cryptocurrencies. Besides, I will walk you through the tools that can help you make trading decisions and explain what margin trading is, why you have to pay to maintain a short position, and why so-called shitcoins can be even more profitable to short than Bitcoin.
The article covers the following subjects:
Major Takeaways
- The cryptocurrency market is bearish most of the time. One year of growth can be followed by four years of decline. Therefore, it is highly profitable to short cryptocurrencies.
- Is it possible to short Bitcoin? Absolutely. It works the same way as with any other cryptocurrency, and plenty of traders profit from it.
- Is there a trading strategy using advanced indicators that helps initiate short trades? There are two indicators that can predict the end of a cryptocurrency’s growth pretty accurately and, accordingly, give a signal to open a short position.
- The open interest and funding rate indicators, used together, can be powerful tools for spotting shorting opportunities in Bitcoin.
- Weak third-tier cryptocurrencies are much more profitable to short than Bitcoin.
What Is Short (Short Position) in Trading?
First, let’s define what a short position, or short, really is. In simple terms, it is a way of profiting when an asset’s price decreases. Picture it this way:
You borrow 10 Bitcoins from a crypto exchange and sell them immediately at the market price. Suppose that Bitcoin was worth $100,000 at that moment. Now you have $1,000,000 in your account and owe the exchange 10 Bitcoins.
There are two possible scenarios:
- Your prediction was correct, and Bitcoin dropped by 1% or $1,000, reaching $99,000. You buy 10 Bitcoins for $990,000, return them to the exchange to repay your loan, and walk away with a $10,000 profit. A happy ending!
- But what if you were wrong and Bitcoin rose by 1% instead? You still owe the exchange 10 Bitcoins, but now they are worth $110,000 each. To cover your loan, you have to pay extra money. And if you cannot, the exchange will protect itself by liquidating your position, a process known as a margin call.
Therefore, short positions always involve margin trading and carry risks that should be managed carefully.
Why Is It Called Short?
The term “short position” may sound strange at first. Why is it called “short”? The explanation is actually simple. Short trades are typically held for a shorter period than long trades, which is why the positions are called “long” and “short.”
This is because short selling is always margin trading. In practice, a trader borrows an asset from the exchange in order to sell it later at a lower price. Since it is borrowed, the short-seller must pay for that debt every day. The cost may seem small when dealing with thousands of dollars, but large players operate with tens or even hundreds of millions of dollars. They definitely do not want to pay interest on such enormous sums for a long time.
Since short trades are usually brief, market downturns also tend to unfold quickly. This is why these positions are called “short.”
Can You Make Money Shorting Bitcoin?
Shorting Bitcoin can be profitable, just like shorting any other asset. Some of the biggest and most famous trades in history, like those by George Soros, were shorts. Actually, his positions were less about trading and more about moving the entire market.
The market is cyclical, with alternating periods of growth and decline. For instance, cryptocurrencies have been continuously falling from 2020 to 2024. Apparently, if the overall market trend is bearish, it is much easier and more profitable to earn money on short positions. Such bearish trends occur several times a week on M5–M15 time frames.
Success Crypto Shorting Examples
The screenshot below illustrates how a short position in Bitcoin might look on a daily time frame.
That trade lasted only 12 hours and generated a solid profit. It is an example of shorting using a futures strategy, which I will explain further in this article. There are many ways to short cryptocurrencies and Bitcoin in particular, but the most straightforward, in my view, is intraday futures shorting. These trades are brief, so the cost of maintaining a margin position is low, while the risks remain limited and manageable.
How to Short Bitcoin in General?
So how can you capitalize on Bitcoin’s decline? There are many strategies, and no single article can cover them all. Here, however, you will learn about the most popular methods and can choose the one that works best for you. Just keep in mind: short selling always involves margin trading.
Crypto Margin Trading
What exactly is margin trading? It is trading with the stock exchange’s funds, or trading with a loan on a margin account. You borrow a certain amount of funds or assets and try to use them to increase your profitability. It is also often referred to as leveraged trading. By borrowing money, you increase your profits. However, along with potential profits, the risks also increase.
Furthermore, a margin position usually requires funds to maintain it. Therefore, it is crucial to be careful when trading on margin, especially in crypto. Short trades can be a smart way to profit from borrowed assets because they do not last long. However, you should always follow sound risk management and use stop-loss orders to curtail your losses.
Crypto Futures & ETFs Shorting
In my opinion, the most straightforward and predictable trading strategy is shorting Bitcoin futures, as the margin payment for futures is usually lower than for spot contracts. Moreover, futures come with lower commissions. Another option is shorting Bitcoin ETFs, which have only recently become available. They make sense if the exchange does not offer direct Bitcoin trading. Yet, you can always trade the underlying asset directly through the LiteFinance online terminal.
There are ETFs designed specifically to profit from a downtrend, which allow traders to short Bitcoin.
The BITI ETF (ProShares Short Bitcoin Strategy ETF) shorts the nearest BTC futures contracts on the exchange. If an asset’s price drops by 5% in a day, the profit increases by about 5% before commissions.
Crypto Options Trading
You can also short Bitcoin using options. An option is a contract that entitles but does not oblige you to buy or sell an asset at a predetermined price. The easiest way to short-sell Bitcoin is to buy a put option. You set a target price (strike price) below the current price and pay a small premium. If the price of Bitcoin dips below your price, the value of your put increases, and you can sell it for more than the current market price. The maximum risk is limited to the premium you paid.
Prediction Markets
Another way to short crypto is through prediction markets. These platforms let you speculate on Bitcoin’s price. You place a bet on where the cryptocurrency price will be on a specific date. If the price moves according to your Bitcoin forecast, the token gains value, and you earn a return. However, if it goes the other way, you face a loss. This approach is somewhat similar to trading Bitcoin CFDs but is closer to speculation than traditional trading, so I will not cover it in detail here.
Step-by-Step Guide to Shorting Crypto with LiteFinance
Shorting cryptocurrencies on the LiteFinance platform is actually very simple.
- Log in to your trading account.
- Navigate to the TRADE tab on the left menu.
- Select the CRYPTOCURRENCIES section.
- Choose a trading instrument, for example, Bitcoin.
Then, you will see the price chart, where you can open trades.
Select SELL in the window on the right, set the trade entry parameters, and, if needed, adjust take-profit and stop-loss order settings. Next, click SELL.
That is how you short Bitcoin. The trade immediately appears in your portfolio at the bottom of the screen. Now, if the price goes down, your profit will increase!
The only thing left to know is when to open short positions in Bitcoin.
How to Know When to Short Bitcoin?
Now we get to the most interesting part: how do you know when it is the right time to short Bitcoin? I will show you how to spot signs of a potential drop in the Bitcoin price. All we need are two indicators, a touch of fundamental analysis, and a bit of brainpower.
Crypto Technical Indicators
There are two indicators that show current market data and can help decide whether to enter short trades.
Open Interest Indicator
Open interest is usually shown as a separate chart below the price quotes (1). It represents the total number of open futures contracts in the market, which reflects overall market participation and capital involved in Bitcoin trading. Open interest includes both long and short positions.
Funding Rate Indicator
The funding rate indicator shows which side of the market is paying the other. Traders use it to track the balance between perpetual futures and the spot market. When there are more long positions, bulls pay bears, and the indicator is green. When there are more short positions, bears pay bulls, and the indicator is red.
Short-Sell Bitcoin
This shorting strategy for trading cryptocurrencies is based on the idea that every strong trend eventually faces a correction. The goal is to capture those moments and profit when prices turn downward. Two key indicators can be used to identify that shift.
- First, check the open interest indicator for signs of weakening demand. There should be a drop in values, and not just any drop, but after a prolonged growth. That is the key signal as we are looking for a correction.
- Next, check the funding rate. A high funding rate tells you that the market is crowded with bulls, and they are the ones paying most of the costs. You need to catch a decline from those extreme levels, as it will indicate that bulls are starting to back out.
If both signals line up, you can look for an entry. Place your stop-loss just above the swing high, and set your take-profit at about 2 to 2.5 times the size of your stop. That way, you can offset potential losses.
Fundamental Analysis
In addition, do not ignore fundamental analysis when you trade. For example, shorting right after the Fed announces a rate cut makes little sense. Moves like that almost always send prices higher, no matter what indicators are saying. That is why selling strategies work best in calmer conditions or when market sentiment is negative.
Risks of Shorting Crypto
Risk management is critical when trading crypto because the market’s volatility tends to be high. Every short trade is essentially margin trading, which adds extra risk. However, risk also opens the door to reward. If you apply short-selling strategies to weaker assets than Bitcoin, the profit can be even bigger. When Bitcoin drops 5%, some altcoins can fall 20% in a single move. With disciplined risk management, those swings can turn into serious profit opportunities.
How to Minimize Shorting Risks?
Always use a stop-loss order to avoid unnecessary stress. Even if it is sometimes triggered, you can always open a new trade as long as market conditions stay the same. At least you will know for sure that your losses are capped at the stop, so your entire deposit is never at risk.
Conclusion
Margin trading in crypto is highly risky, so you need to be extra cautious. At the same time, the potential rewards from short-selling Bitcoin can be just as big.
Adding short positions in smaller cryptocurrencies can boost your returns even further. But if the risks feel too high, it might be better to start by learning how to invest in Bitcoin.
The content of this article reflects the author’s opinion and does not necessarily reflect the official position of LiteFinance broker. The material published on this page is provided for informational purposes only and should not be considered as the provision of investment advice for the purposes of Directive 2014/65/EU.
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