In this article, I will be discussing the process of shorting cryptocurrencies on the popular trading platform, Robinhood. Shorting, or short selling, is a trading strategy that allows traders to profit from the declining prices of an asset. In the world of cryptocurrency, this technique can be a bit more challenging, but with the right knowledge and approach, it can be a powerful tool for maximizing profits. We will cover the basics of short selling, the process of shorting crypto on Robinhood, and some tips for success. Whether you’re a seasoned trader or new to the world of crypto, this guide will provide a step-by-step guide to help you get started with shorting on Robinhood.
UPDATE: it is not possible to short crypto on Robinhood. Sorry, I figured this out after writing all the instructions on how to short. However, you can still follow these steps to short crypto. One exchange I have found that does this is Kraken ( I don’t get any commissions for this).
How to Short Crypto on Robinhood
Shorting crypto means borrowing crypto when its price is high and selling it immediately while anticipating buying it back when the price is low. You can then return it to the lender at that low price. Thus, the profit you make is the difference between the higher price at which you sold it and the lower price at which you bought it back. The main purpose is to make a short-term gain from price drops before they begin to rally.
Robinhood is one of the most preferred crypto platforms for shorting cryptos. Why? It is not only commission-free but also beginner-friendly.
The 8-step process of shorting your crypto on Robinhood
Shorting your crypto on Robinhood involves the following key steps:
- Sign Up
- Open a margin account
- Carry out analysis
- Formulate a trading strategy
- Open a short position
- Cover your position
- Monitor the performance of your trade
- Take a yield action
1. Sign up with Robinhood
Robinhood has both a mobile app and a web app for you to sign up. Choose the one convenient for you. You will need to provide a government-issued ID.
2. Open a margin account
Shorting cryptos requires you to open a margin account. After successfully signing up, you can now open a Margin Account once you meet the eligibility criteria.
Using mobile app
The following steps are needed when using the mobile app:
- Open Robinhood App
- Go to the bottom-right corner and tap on the Person Icon
- Tap on the Hamburger icon that comes up in the top right corner
- Select the yellow icon on the top right
- Choose margin investing
- Turn on margin investing
- Confirm your choice
Eligibility criteria
To be eligible, you need to:
- Have a Robinhood Gold Account. It costs $5 a month with a 30-day-free subscription on sign-up
- Have a minimum portfolio of $2,000. In case you are a designated day trader, you need a minimum portfolio of $25,000
- Be a US citizen or permanent resident.
3. Carry out analysis
Carrying out analysis is an important step to making an informed decision. If you lack the time or technical know-how, you can hire the services of a financial advisor to analyze on your behalf. Two major types of analysis are:
- Fundamental Analysis: Fundamental analysis is used to determine the intrinsic value of a currency. Unlike technical analysis, fundamental analysis does not primarily focus on price, which is but instead on the long-term value that a token creates. You can learn more about this in my article on why is cryptocurrency worth anything.
- Technical Analysis: This relies on using technical tools to make statistical forecasts based on the analysis of historical data. The core purpose of technical analysis is to evaluate a security’s strengths and weaknesses based on price movements and thus be able to forecast future price performance. Unlike fundamental analysis, technical analysis does not focus on evaluating a financial asset’s intrinsic value but its extrinsic value in terms of price performance.
Since cryptos are virtual and not backed up by real assets, fundamental analysis isn’t of much significance as in stock trading. Furthermore, due to the short-term nature of short-selling, it is less relevant.
What is the purpose of carrying out the analysis?
When it comes to shorting crypto, the main purpose of the analysis is to find out those cryptos that are primary candidates for shorting.
Technical indicators to watch out
There are several technical indicators that traders use to identify potential short-selling opportunities in the cryptocurrency market. These include:
- Moving Averages: Moving averages are used to smooth out price fluctuations and identify trends. If a cryptocurrency’s price is consistently below its moving average, it may indicate that the price is likely to continue to decline and may be a good opportunity for short selling.
- Bollinger Bands: Bollinger Bands are a volatility indicator that consists of a moving average and two standard deviation lines. If a cryptocurrency’s price touches the upper band, it may indicate that the price is overbought and may be due for a correction, providing a potential short-selling opportunity.
- RSI (Relative Strength Index): The RSI is a momentum indicator that measures the strength of a cryptocurrency’s price movement. If a cryptocurrency’s RSI is above 70, it may indicate that the price is overbought and a correction may be imminent, providing a potential short-selling opportunity.
- MACD (Moving Average Convergence Divergence): The MACD is a trend-following indicator that helps traders identify potential trend reversals. If the MACD line crosses below the signal line, it may indicate that a downtrend is emerging, providing a potential short-selling opportunity.
Thus, the ballooning growth is vacuous and is bound to explode very soon.
4. Formulate a trading strategy
A strategy is simply a plan of action that enables a trader to make a beneficial decision. This trading strategy should answer the W4H of decision-making – What? Why? Where? When? and How? For example;
Entry strategy:
- What crypto should I short? (e.g., bitcoin, ether, HOOD, etc.)
- Why should I short this crypto? (e.g., it has the highest potential return)
- Where should I short it? (e.g., the forex platform, a point on the forex chart, etc.)
- When should I short it? (e.g., best timing based on analysis)
- How should I short it? (e.g., short-selling tools to use and how to use them)
Exit strategy:
- When should I buy back? The timing should be based on a certain percentage drop in price. For example, you can buy back when the price drop by 30% below your purchase price.
- At what price should I buy back? Based on the above percentage you can establish the actual buy-back price.
- Should I put up a buy-stop order? With a buy-back price determined, you can place a buy-stop order which will automatically buy the cryptos when the price rises above your set limit.
5. Open a short position
After carrying out thorough research and formulating a trading strategy, the next step is to open a short position. Taking a short position means borrowing and quickly selling the borrowed cryptos.
Attention!!! You can’t short crypto on Robin Hood
UPDATE: It is not possible to short crypto on Robin Hood. The platform does not allow shorting. While when trading stocks or ETFs on Robin Hood you can short by buying put options the crypto platform is a separate legal entity that does not offer put or call options. Sorry about that. I did not mean to mislead you but I only found out after starting to write this article
6. Cover your position
Covering your position is about measures to protect you from uncalculated losses at the buy-back stage. Taking a short position involves risks since you don’t know how low the prices will drop or when they will begin to pick up again. Covering your position algorithmically is the best choice. In this case, you can use the buy-stop order. You always want to cut your losses in case price moves in the opposite direction of what you expect.
7. Monitor the performance of your trade
One of the best ways to monitor the performance of your trade is to use charting tools. Monitoring performance not only enables you to make the right decision on the current trade but also to gain valuable experience that you can utilize in future trading. If you don’t monitor your trade, you are likely going to lose out on many opportunities to maximize profit or minimize loss.
The Top 7 ways to short your crypto on Robinhood and beyond
Cryptocurrency exchanges have advanced to such an extent that they have almost completely mirrored the stock market and the forex market in terms of the many different ways available for trading and investment. Shorting crypto is one such element of mirroring.
There are 7 main ways by which you can short cryptos on the cryptocurrency market:
- Margin trading
- Futures contracts
- Binary options trading
- Predictions
- Short-Selling
- Contracts for Difference (CFD)
- Inverse ETFs
Let’s tackle each of these, beginning with margin trading. Where applicable, we are going to use bitcoin as the standard of choice for those crypto traders who actively short cryptocurrencies, especially on the Robinhood crypto exchange. Apart from bitcoin, Robinhood Crypto is another preferred choice being this platform’s native currency.
1. Margin trading
Margin trading refers to borrowing crypto to pay back at a later date. Thus, you open a margin account with the crypto broker on which you are charged interest on borrowing. A margin trading account is a special brokerage account specifically created for margin trades. The account remains owing until you pay it back.
So, what is a margin? Depending on the context, the term margin can mean so many different things. In the context of shorting crypto, a margin is a collateral value that a crypto trader has to deposit with the broker or a margin trading platform as a credit risk coverage for the amount borrowed to buy a financial instrument. In essence, a margin is the amount of money that an investor has in the margin account. This deposit plus the top-up that the broker advances become the amount of loan issued to the borrower.
For example, the borrower deposits a 20% margin and the broker tops it up with 80% to provide the 100% required to purchase a given financial instrument. This financial instrument then becomes the collateral and operates in a similar way to a mortgage in the sense that the borrower has the possession but not ownership rights.
Margin trading requirements vary from one platform to another.
2. Futures contracts
A futures contract is a binding agreement to buy or sell a particular quantity of an asset or instrument at a predetermined price at a specified future date. A futures contract is often abbreviated as ‘futures’.
What is the purpose of having a futures contract? The overriding intent is to lock a given price into the future to avoid future price uncertainties. Furthermore, since futures are issued by the trading platform, counterparty risks are avoided.
Futures are by themselves instruments tradable on the futures market. They are traded on the exchanges just the same way equity stocks are traded on the stock market. Robinhood provides a futures trading platform where crypto investors can short bitcoin futures. In this case, bitcoin is the underlying asset for this type of futures trade.
3. Options Contracts
There are two types of options contracts – a call option and a put option.
A call option is a financial instrument that grants the buyer the right but not the obligation to buy an underlying asset at a specific price within a specified future date. A call option is exercised by a bullish buyer.
A put option is a financial instrument that grants the seller the right but not the obligation to sell an underlying asset at a specific price within a specified future date. A put option is exercised by a bearish seller.
This specified price for options trading is known as the strike price. Options are derivatives that can be bought and sold in an options trade as if they are assets in their own regard. Their value is based on an underlying asset. In the crypto market, the most common underlying asset is the bitcoin and the strike price is thus the price of bitcoin. Other major underlying assets include ether.
4. Predictions
A prediction market is a place where contracts created and priced based on the outcome of an unknown future event are bought and sold. They are more or less the same as other forms of betting only that they are integrated into the trading platform along with other financial instruments.
However, unlike ordinary betting, the outcome is about the impact of a particular event on the price of an asset or set of assets. For example, a prediction could be based on the impact of US elections (an event) on bitcoin’s price (an outcome).
They are also very similar to a futures contract with the only differentiating factor being the event in the case of predictions as opposed to an asset in the case of futures.
5. Short-selling
Short-selling is the boldest of all the mentioned means of shorting cryptos on the bearish markets. In this strategy, short sellers wager on those assets that they believe are likely going to experience a deep dive in prices.
A short sale on Robinhood involves three key steps:
- Determine those assets that are likely going to deep-dive soon. Borrow a certain quantity of them almost at their peak price.
- Sell them immediately after buying
- Strategically wait at the trough point to buy them back at their lowest price
- Return the borrowed assets at their quantity
Thus, while the quantity borrowed is the same, the price at the borrowing point is significantly higher at the borrowing point compared to the price at the returning point. The price difference is the gain.
6. Contracts for Difference (CFD)
A contract for difference (CFD) is an agreement between a seller and the buyer which expresses that the buyer must reimburse the seller the difference between the current price of an asset and its price at the contract time. This difference is settled in cash (or cash equivalents).
CFD is a derivative and hence a financial instrument that allows investors to trade and profit from the price movement of an underlying asset without having to buy or own it. For example, a crypto investor can trade in bitcoin CFD without necessarily buying or selling bitcoins.
7. Inverse ETFs
An inverse ETF is a basket of derivatives specially designed to cater to the interest of the bearish market. The term ‘inverse’ points to a downward trend ideal for bears as opposed to the ordinary upward trend expected for bulls taking a long position. Taking a short position is always bearish and thus inverse ETFs.
While most options that we have discussed so far rely on the decline in the price of an underlying asset, Inverse ETF relies on the decline in the price of an underlying benchmark such as the S&P 500, etc. Thus, Inverse ETFs are ideal for retail investors who want to diversify their portfolio but do not have the financial power to buy a big collection of a wide range of crypto assets.
Conclusion on shorting crypto on Robinhood
Shorting cryptos is one of the riskiest ways to make quick returns. I highly recommend you avoid it unless you are an experienced trader. It is one of the most daring ways of reaping from the volatile nature of cryptocurrencies. Robinhood is one of the leading cryptocurrency trading platforms but unfortunately does not allow shorting cryptos. Instead, use this guide to short crypto on Kraken if you are in the US. I propose Kraken not because I get any commission from promoting them here but rather because I have an account with them and found it intuitive to short on.