OK I get it. You’ve been doing pretty well trading Ethereum. You’ve got the basics down like buying and holding. However, if you’ve been observing the volatility of the crypto market, you may have wondered how to capitalize on Ethereum’s downward price movements. That’s where the art of shorting Ethereum comes into play—a technique that allows you to profit from a cryptocurrency’s decline. In this article, I will show you how to short Ethereum. I will walk you through the process step by step and help you understand the risks involved, and give you some practica tips.
Disclaimer: While I will give you precise advice on how to short Ethereum you need to be aware that shorting ETH is way riskier than long positions. In my experience most people lose money when they try to short.
Ready? Let’s do this.
What is shorting?
Shorting basically means placing a bet that the price will drop.
For example say you believe that the price of Ether will decrease. Well, what if you could borrow some Ether today and give it back next week?
You could then sell the Ether today and buy it back next week at a lower price when you return it.
This way you pocket the difference in price and make a profit from the price dropping.
Let’s look at an example with numbers.
Shorting ETH example
Say the price of ETH is $1,500. And say you borrow 10 ETH ( I will show you how you can do this further down).
You immediately sell the ETH you borrowed and get $15,000.
Now say the price of ETH drops and you want to close your trade. Let’s assume the price dropps to $1,400. What do you do?
Well, you can buy 10 ETH for $14,000 and give it back to the exchange you borrowed it from.
What happened here?
You sold ETH for $15,000 but only had to pay $14,000 to buy the ETH back. You’ve made $1,000 in profit minus any fees you needed to pay the exchnage.
What if the price of ETH rises
Let’s stick with the example. If instead of the price dropping the price increases the exchange needs you to pay them. And because they don’t know you, they are going to ask for some collateral or margin upfront.
So imagine you put up $1,000 as collateral. Like before you borrow 10 ETH and sell it because you expect the price to drop. So you have $15,000 in your pocket.
But say the market goes the opposite direction and ETH rises to $1600. Well now to pay back the exchange you need to buy 10 ETH for $16,000. You use the $15,000 to buy 9.37 ETH. The exchange will now use the remaining $1000 you had as collateral to buy the rest of the ETH.
Step-by-step Guide on How to Short Ethereum:
#1. Open an account with a reputable cryptocurrency exchange or brokerage platform.
- To begin shorting Ethereum, the first step is to open an account with a reputable cryptocurrency exchange or brokerage platform.
- Look for platforms that have a user-friendly interface. Some popular exchanges for bitcoin trading include Coinbase, Binance, and Kraken. You won’t be able to short crypto on Robinhood.
- Once you have chosen your preferred bitcoin trading platform, sign up as a trader and complete the registration process. This usually involves providing your personal information and verifying your identity.
- Make sure to choose a strong password and enable two-factor authentication for added security.
#2. Deposit funds into your account and familiarize yourself with the platform’s interface.
After successfully creating an account, it’s time to deposit funds into it.
- Most platforms support various deposit methods such as bank transfers, credit/debit cards, or even other cryptocurrencies like Bitcoin.
- Choose the method that suits you best as a trader and follow the instructions provided by the platform to complete the deposit.
#3. Identify the desired amount and duration for your short position on Ethereum.
Before executing any trades you need to make some tough decisions.
Firstly please decide how much you want to invest in your short position on Ethereum.
Professional traders usually don’t risk more than 1% of their trading capital.
If that sounds low to you then you need to be aware that it’s your emotions talking and not logic. People who succeed at trading over the long run plan their actions meticulously, stick to a methodology and are not greedy.
Secondly, you must decide on the duration of your short position.
Do you expect ETH’s price to decline over a few hours? Or are you anticipating a more extended bearish trend in the crypto market?
Having a clear timeframe in mind will help you stick to your plan.
#4. Execute your trade by placing a sell order for Ethereum.
Now that you have determined the amount and duration of your short position, it’s time to execute the trade.
On the platform’s interface, locate the option to place a sell order for Ethereum and then select margin or leverage.
As an example here is how to do it on Kraken but it is pretty similar on other platforms as well.
- Got to the ETH/USD pair
- Select sell. If you click on sell you will just sell any ETH you have. This isnt really short selling.
- To short sell you need to click where it says spot and change it to margin. This means that the exchange will now lend you the ETH and sell it.
- To open a margin you need, erm, margin. This means you need to have some collateral in the account already.
- Next choose the amount of leverage you want. For example if you have $1000 worth of collateral with 5x leverage you can borrow $5000 worth of ETH.
- Set a stop loss. This will indicate the price at which you want to buy back and retrun the ETH. The stop loss price is up to you. If you set it very low then you make a lot of money if it hits the price but you risk the price going in the opposite direction in the meantime. If you set it too high then you risk paying all the exchange fees for only a small return so it might not be worth it. Whetevr you do don’t just place a market order and leave it up to fate. This is very risky behavior.
Choosing the Best Platforms for Ethereum Shorting:
All of the major crypto exchanges allow you to short in some way or another.
I have a personal preference for Kraken because it is the easiest to use when shorting. Other plaforms such as Binance require you to deposit $10,000 in a margin account before you can start shorting. Coinbase and the rest I have not tried but I assume they are decent enough.
Also note that brokers such as eToro, Robinhood, Webull and the like don’t allow you to short Ethereum. So you are going to have to go with a crypto exchange
Alternative ways to short Ethereum: Options trading
Ok up until now I have been describing margin trading.
Margin trading allows traders to amplify their positions by borrowing funds from an exchange or broker. This means that you can trade with more Ethereum than you actually own, giving you the opportunity to take advantage of market movements even if you don’t have a large amount of capital upfront.
However there is another way to place a bet on the price of Ether going down and that is to buy a put option.
In the world of investing, a put option is like a special power-up that lets you sell something at a specific price, even if its value goes down. It’s like having a secret weapon against falling prices!
Imagine you have a stock or some other asset, and you’re worried that its value might drop in the future. With a put option, you can make a deal that allows you to sell that asset at a certain price, no matter how low its actual market value goes. It’s like having a safety net that protects you from potential losses.
So, if the asset’s price does take a nosedive, you can still sell it at the higher agreed-upon price thanks to the put option. This gives you a chance to lock in profits or limit your losses when things aren’t going well in the market.
Put options are like a superhero cape for investors, providing them with the ability to shield themselves from the perils of falling prices. They give you more control and flexibility in your investment strategy, so you can navigate the ups and downs of the financial world with a little more confidence.
With a put option your loss is limited to the cost of the put option.
Put options example for shorting ETH
Going back to my original example. Say the price of ETH is $1,500. And say you buy 10 put option that expire in 1 month for $500. Now say the price of ETH drops to $1,400. If you exercise your put options it measn you are buying them at 1400 from the market and selling at the agreed upon price of 1500 to the seller of the put option. Hence you have made $1000 minus the $500 cost of the put options.
If the price of ETH goes up then you have only lost the money you used to buy the put options. It literally is like buying a bet slip.
The largest platform for buying put and call options is Deribit.
Other platforms such as eToro, Robinhood, Fidelity etc don’t offer options on crypto products.
Understanding the Risks of Shorting Ethereum:
Shorting Ethereum on cryptocurrency exchanges comes with its fair share of risks that traders need to be aware of before engaging in this strategy.
By borrowing and selling Ethereum with the expectation that its price will decrease, traders can potentially make a profit.
However, it is crucial to understand that the maximum profit you can make is 100% because prices can’t go to less than zero. In contrast if you go long on a cryptocurrency your theoretical maximum is infinity (as some luck bastards who got in early on Dogecoin and other memecoins discovered).
Potential Losses if the Price Rises
One of the primary risks when shorting crypto like Ethereum is the potential for losses if the bitcoin price unexpectedly rises. This means that you could lose all your collateral.
When traders borrow and sell Ethereum at a certain price, they are obligated to buy it back later to return what they borrowed. If the crypto prices increase during this period, traders may have to repurchase Ethereum at a higher price than what they initially sold it for, resulting in a loss. Like I showed you in that example. This is known as a margin call.
Proper Risk Management is Essential
Engaging in short selling of crypto, such as bitcoin or Ethereum futures, requires careful risk management strategies.
You need to set clear stop-loss orders or establish predetermined exit points to limit potential losses if the trade moves against you.
Implementing risk management techniques such as setting appropriate position sizes and diversifying one’s portfolio can help mitigate some of the risks involved in shorting Ethereum prices.
Effective Strategies for Successful Ethereum Shorting:
Technical analysis can help identify potential entry and exit points for short positions on Ethereum.
One effective strategy for trading ETH is to utilize technical analysis. By analyzing historical price data and patterns, traders can identify potential entry and exit points for their short positions in ETH. Technical indicators such as moving averages, trendlines, and oscillators can provide valuable insights into the direction of the ETH market.
- Moving averages: Traders often use moving averages to determine the overall trend of Ethereum’s price. When the price falls below a moving average, it may signal a potential opportunity to initiate a short position.
- Trendlines: Drawing trendlines on an ETH price chart can help identify areas of ETH resistance or support. If the ETH price breaks below a significant ETH trendline, it could indicate a bearish ETH trend and an opportunity for shorting.
- Oscillators: Indicators like the Relative Strength Index (RSI) or Stochastic Oscillator can indicate overbought or oversold conditions in the market. When these indicators show extreme levels, it may suggest that Ethereum is due for a reversal and present an opportunity to open a short position.
Stay updated with market news, events, and trends that may impact the price of Ethereum.
To successfully short Ethereum, active management is crucial. Traders must stay informed about market news, events, and trends that could influence the cryptocurrency’s price movements. By monitoring relevant information regularly, traders can make more informed decisions about when to enter or exit their short positions.
- Market news: Keep track of news articles, social media discussions, and official announcements related to Ethereum. News about regulatory changes or technological advancements in blockchain technology could significantly impact its value.
- Events: Pay attention to scheduled events such as conferences or product launches related to Ethereum. These events often generate increased trading activity and volatility.
- Trends: Analyze broader market trends and sentiment towards cryptocurrencies. If there is a general downturn in the crypto market, it may present an opportunity to short Ethereum.
Implement risk management strategies such as setting stop-loss orders to limit potential losses.
When engaging in any trading strategy, including shorting Ethereum, managing risk is paramount. Traders should implement risk management techniques to protect themselves from significant losses. One effective approach is to set stop-loss orders, which automatically close out a position if the price moves against the trader’s expectations.
Here are some risk management strategies:
- Stop-loss orders: Determine a predetermined price level at which you will exit your short position to limit potential losses in ETH.
- Position sizing: Carefully consider how much of your portfolio you are willing to allocate for shorting Ethereum. Avoid risking too large a portion on a single trade.
- Diversification: Consider diversifying your trading portfolio by including other assets or cryptocurrencies alongside Ethereum shorts. This can help spread risk and reduce exposure to any single asset’s volatility.
Consider using a combination of fundamental analysis and technical indicators to make informed trading decisions.
Successful traders often use both fundamental analysis and technical indicators when making trading decisions, including shorting Ethereum. Fundamental analysis involves evaluating factors that could impact the cryptocurrency’s value, such as its underlying technology, adoption rates, or regulatory developments. By combining this with technical indicators, traders can gain a more comprehensive understanding of market conditions before opening short positions.
Key Takeaways on Shorting Ethereum:
In conclusion, shorting Ethereum can be a lucrative investment strategy, but it comes with its fair share of risks. Understanding these risks is crucial before diving into the world of short selling. Following a step-by-step guide can help you navigate the process effectively.
When selecting a platform for cryptocurrency transactions, it’s crucial to consider factors such as fees, user experience, and security. Doing thorough research will ensure that you choose an eth platform that aligns with your needs.
To increase your chances of success when shorting Ethereum, employing effective strategies is key. Whether it’s technical analysis or staying updated on market trends, having a well-thought-out plan can significantly impact your returns.
Q: What are the main risks involved in shorting Ethereum?
A: The main risks include price volatility leading to unexpected losses in eth, potential regulatory changes impacting the market dynamics of eth, and the possibility of being caught off guard by sudden market shifts in eth.
Q: Are there any specific platforms that are recommended for shorting Ethereum?
A: While there are several platforms available, some popular options for short selling Ethereum include Bitfinex, Kraken, and Binance. It’s advisable to research and compare the features and fees of different platforms before making a choice.
Q: Can I use leverage when shorting Ethereum?
A: Yes, many platforms offer leverage options for Ethereum shorts. However, it’s important to exercise caution as higher leverage increases both potential profits and losses.
Q: Do I need to provide identification documents to engage in Ethereum short selling?
A: Yes, most reputable platforms require users to complete a Know Your Customer (KYC) process which involves providing identification documents such as a passport or driver’s license. This is necessary for the verification of eth users.
Q: What are some effective strategies for successful Ethereum shorting?
A: Some effective strategies for investing in ETH include technical analysis, monitoring market trends and ETH news events, setting stop-loss orders to limit potential ETH losses, and diversifying your portfolio to mitigate ETH risks.
Remember that investing in cryptocurrencies like ETH carries inherent risks and it’s essential to do thorough research and seek professional advice before making any investment decisions.
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