All About Borrowing and Shorting Cryptocurrencies

With cryptocurrencies an increasingly prominent financial asset, interest is growing in the ways to bet on it – and against it.

Besides traditional buying and holding – and never selling as the HODLers will tell you –there's a steady increase in opportunities for more advanced trading tools for crypto: crypto short selling, margin lending, portfolio loans, and more.

(Read more about crypto borrowing here.)

Depending on your outlook and propensity for risk, you’ve got options when it comes to shorting cryptocurrencies or betting on a decline.

Summary of Crypto Shorting Opportunities

  • Shorting is the act of selling a borrowed asset (in this case cryptocurrency) in hopes of buying it back at a lower price and keeping the difference.
  • Some crypto exchanges offer margin lending and allow for crypto shorting.
  • Other options for making money on a crypto decline include options, futures, and shorting ETFs tied to crypto values.

Understanding Short-Selling

Short selling is an advanced means for experienced traders to profit from a declining security value. It can be profitable, of course, but short-selling also creates unlimited risk for the short-seller. Here’s why.

How Short Sales Work 

Taking out a short position consists of borrowing and then selling a security, in this case a cryptocurrency. 

At the time of the sale, you're left with the cash value of the security you shorted plus your debt to the lender. If the cryptocurrency falls in value, you buy the crypto back on the open market at a lower price and return the asset to your lender to expunge your debt. Your profit is the difference between the original sale price and the price at which you re-purchased it.

For example, if you borrow one Bitcoin and sell it for $40,000, you now have $40,000 in cash and owe one Bitcoin to your lender (generally a crypto exchange or wallet custodian).

Bitcoin then declines to $30,000. 

You buy one Bitcoin for $30,000 on the market, return this one Bitcoin to your lender, and keep the $10,000 difference. You’ve profited from a short sale.

Methods For Crypto Shorting 

Crypto skeptics abound, and demand for ways to bet on a price decline has increased. 

The body of people who see digital currencies as just a modern version of Dutch tulips - a wild speculatory craze - hasn’t shrunk much. You can read crypto bull and bear cases every day on website like MarketWatch. 

Whatever you believe, the same wild volatility of these assets that deters some is precisely what attracts others. 

How can you short cryptocurrencies? Here are some of your options to bet on a cryptocurrency’s decline.

Crypto Margin Lending for Shorting

Some of the same tools to bet on the success of a coin are also suitable to short Bitcoin and other cryptocurrencies. 

Many crypto exchanges offer investors the ability to borrow money from the exchange to fund trades, and traders can use this same service to short crypto in most cases. 

Using borrowed money for investment is the essence of margin lending, a strategy that shouldn't be undertaken lightly as it creates a debt (sometimes unlimited) to your lender. With crypto margin lending, you can borrow the coin you want to short and sell it without owning it in the first place. Your debt remains in the original crypto coin, which enables you to profit if it falls. You can also lose your shirt in an advance.

Popular exchanges that support crypto margin lending include:

  • Kraken
  • Binance
  • eToro

Shorting Through ETFs

Another way to go short crypto is by shorting or using options on ETFs linked to cryptocurrencies. Crypto ETFs and trusts that you may be able to short with a traditional brokerage account include:

  • ProShares Bitcoin Strategy ETF (BITO)
  • Grayscale Bitcoin Trust (GBTC)
  • Valkyrie Bitcoin Strategy ETF (BTF)
  • Amplify Transformational Data Sharing ETF (BLOK)
  • Grayscale Ethereum Trust (ETHE)

Options

Options trading allows those with an asset to own a call or put option, and in the case of binary options, place a bet unidirectionally.

Placing a put order (“buying a put”) means that at a point in the future, you have the option to sell your asset for a pre-determined price. In some cases, that’s simply to hedge your own long position. But you can also use Put options to make money on a declining price. Options for cryptocurrency are limited and present risk, but you can try crypto option trading with:

  • Deribit
  • OKEx

 

Some platforms subscribe to the European style cash-settled options, where no asset is ever in play: just the cash-value.

Futures Trading 

Bitcoin and other cryptocurrencies have seen rapid acceptance in futures markets, with established financial institutions at work. With a futures contract, you can essentially bet on the future price of an asset. By selling futures that predict a higher price or buying contracts that predict a lower price for that asset, you can essentially short the asset and profit if it declines. Some of the players in this space are: 

  • Kraken
  • BitMEX
  • eToro
  • TD Ameritrade

Can You Short Altcoins? 

As the most valuable and prominent coins, Bitcoin and Ethereum are the easiest coins to bet against. Not only do crypto exchanges universally feature these, but they’ve achieved the greatest penetration in the traditional financial system. Exchanges with margin lending capabilities mostly accept the more prominent coins only.

Benefits of Shorting Assets

Short positions are commonly used when someone believes a business or asset will decline in price. That might be for fundamental reasons, like the belief that a company’s financial statements are fraudulent or the underlying business is in danger, or for simple technical reasons, like a security has increased in price so fast that profit-taking is inevitable.

For whatever reason, short selling allows users to profit on a decline. This helps to create market balance, and advocates of short selling believe that it creates incentives for activist investors to sniff out bad actors in crypto or stock markets. Unfortunately in this scenario, most of the alt coins that have gone belly up did not have good shorting options.

The Risks of a Short Position

The greatest risk of a short position is that it carries infinite risk. 

If the value of an asset rises before you return the borrowed asset, the investor suffers losses proportionate to the increase. Since an asset can rise without limit, there's no end to just how much you can lose on a short position!

This gives rise to the short squeeze, where investors can deliberately drive up the price of a shorted stock to undermine short positions. In a short squeeze, investors bid up a security’s value to force those short the stock to “cover” their position. 

Covering a short position, or re-purchasing the asset that you borrowed, can increase the price of an asset by creating new, additional buying. A short squeeze can create huge price swings. 

Famous Short Positions

The risky nature of shorts means that investors typically target overvalued, speculative, or inflated assets that they're confident will go down with time. However, sometimes short-selling goes wrong in a big way. 

Carl Icahn vs Bill Ackman, Herbalife

Famed investor Bill Ackman spent five years at war with Herbalife (HLF), making the case that the company was a scam that deserved regulatory scrutiny. He took out a massive short position and advocated publicly for his view, which ultimately drove the price down about 20%. However, investor Carl Icahn countered Ackman’s position publicly and took a large position in Herbalife. When the dust settled years later, Carl Icahn was reportedly $1 billion richer and Bill Ackman was $1 billion poorer.

WallStreetBets vs The World, GameStop

GameStop (GME) had never been a darling of the public, with its infamously poor trade-in rates and a seemingly outdated business model. It was the most shorted company in the world for a time, but small investors on the Reddit forum /WallStreetBets banded together in 2021 to orchestrate a squeeze that triggered a chain reaction of crumbling short positions. GME’s price rallied more than 3000% and hedge funds banking on the collapse of GameStop reportedly lost hundreds of millions of dollars. GameStop and the WallStreetBets movement will likely be a chapter in every finance textbook for decades.

Getting A Crypto Loan

For those betting on the opposite – price appreciation – there are more options. You can borrow against your crypto position to access liquid cash, rather than selling. In this case, a lender like those at getastockloan.com can lend you secured by your crypto position. The loan can be repaid any time, and we work with most cryptos in most jurisdictions. And, our approach is non-recourse, meaning your crypto collateral is the only thing at risk. It’s fast and easy.

You can learn more about our fast close times and regions in which our lenders operate by clicking here.