How to Short Cryptocurrency: A Guide to Shorting Crypto in the Falling Market

  • Marina Vassilopoulos, at My Mulah

  • 23.05.2023 10:45 am
  • #crypto

Cryptocurrency has gained attention in recent years due to its associated risks in trading. UK lawmakers have resultantly suggested that trading cryptocurrency is actually comparable to gambling. They moreover stated that they have ‘no intrinsic value’, a statement that has been heavily criticised across the cryptocurrency industry. 

This is especially poignant at a time when crypto trading has drastically decreased, causing the market to drop by over $2 trillion in 2022. However, shorting cryptocurrency can still be a lucrative and profitable venture. The practice refers to selling currency you don't own to drive the market down, or  'shorting' the market. Following the purchase, you can buy back the crypto at a low price, before returning it to the lender to make a profit - meaning you effectively manipulate the market to suit your needs. While this may sound easy - it’s not. Shorting cryptocurrency is a skill, one that can take a long time to master. 

My Mulah has developed a guide on how to effectively short cryptocurrency, which provides information on taking advantage of opportunities while minimizing risks.

Extensive Research

When considering shorting cryptocurrency, it is crucial to perform thorough research. This involves identifying the cryptocurrency, analyzing its current value and frequency of price fluctuations, and evaluating predictions for its potential outcomes. Remember, you should never just think about the present - instead, you should look at as many forecasts as possible, both coin-specific and industry-wide to determine your next steps. 

To gain knowledge about cryptocurrency, it is advisable to access various online resources like blogs and newspapers dedicated to the topic. Furthermore, referring to platforms like CoinDesk or CoinMarketCap for the latest prices can assist in making well-informed buying and selling choices, with real-time changes advising your next steps. 

In addition, before you commence training, it is advisable to conduct research on the various trading platforms available. You should take into account factors such as reputation, withdrawal fees, and restrictions. These factors can greatly influence financial profits, highlighting the importance of selecting a platform that suits your individual requirements.

Talk To A Broker

It is recommended to hire a broker when trading cryptocurrency. These individuals not only possess extensive experience in the financial market, but they also have specialist, insider knowledge of the cryptocurrency market. As such, working with one can help you to manage and minimise any trading risks, and profit a wealth of valuable insights. This is applicable no matter your experience - a broker’s insights can help even the most successful traders. 

Another key aspect of hiring a broker is their increased access to liquidity, with the more experienced or professional brokers having access to a larger pool. This is essential, as liquidity allows for easy conversion of coins or cash, and successful shorting and profit generation, therefore, relies on liquidity. If you want to trade coins in a stable and profitable market, high liquidity is needed, so avoid any brokers with minimal liquidity for the best results. 

Finally, brokers are available to offer assistance, answer questions, and provide advice in case of any potential mistakes or issues. This availability can be incredibly helpful when trading, and their capabilities as a support network can be useful if you are unsuccessful in trading. 

Purchase The Crypto You’ll Be Shorting

After completing your research and selecting a broker, you need to choose a cryptocurrency to short. It is recommended to explore various platforms to find one that meets your requirements, in terms of how much you’d like to trade and the finances you’ll be investing. Some popular options are Binance, Kraken, and Gemini, but it is essential to confirm if the site offers the functions you need and to choose the one with the interface you find most user-friendly. 

When setting up an account, it's crucial to be aware that certain websites exclusively trade cryptocurrency in US dollars. As a result, we recommend using a third-party service, like PayPal, when adding money to your wallet. This is because PayPal supports multiple currencies and can be utilised with ease, making the process efficient, secure and fast.

To start shorting cryptocurrency on the website, add funds to your account and find the crypto that you’d like to trade. ALWAYS double-check the name before purchase - many coins have similar names or variations, and buying the wrong one is a near-guaranteed way to undo your hard research and experience financial losses. 

Keep a hardware wallet nearby to securely store your cryptocurrency, though an online wallet is also an option, albeit less secure. Instead, using a physical hardware wallet is a great way to reinforce your crypto, leaving you less vulnerable to hacking. 

At this stage, it is important to be mindful when investing in cryptocurrency. The market is known for its competitiveness and volatile nature, so it's advisable not to invest more than you can afford to lose. This will help you to avoid any potential financial troubles.

Consistently Check-In

Monitoring the value of cryptocurrency is important, as the market is prone to significant price changes. Neglecting this task could lead to missed chances, financial losses and a frustrated broker - so make sure to regularly check the price of your crypto. 

There are multiple techniques available to keep track of the value of your cryptocurrency. One method involves regularly monitoring the market through price platforms like CoinDesk or CoinMarketCoin, which offer real-time updates. Alternatively, you can set up 'stop-loss' and 'take-profit' orders, which help to protect you. But what do these mean?  

Stop-loss orders refer to when you let your platform of choice sell your cryptocurrency if it reaches a certain price. This can safeguard you by selling the coins if their value decreases. Alternatively, a take-profit order permits you to sell when your crypto reaches a certain point, allowing you to make a profit. Just remember, there is one disadvantage: you could sell before the price rises, missing out on potentially huge profits. Some platforms may also lack these features, so as stated before, research is essential. 

Be Mindful Of Risks

One of the most important things you can do is make crypto shorting fun, instead of letting it consume you, or financially devastate you. You should always be mindful that crypto trading is both enjoyable and lucrative - but it can also be financially dangerous. It's not a game, and losing money can be tough to recover without further investment. That's why it's important to never invest more than you can afford to lose and to never ‘gamble’ any important finances or equity. 

Another key thing to remember is that you should be prepared to lose money, at least initially, when you begin shorting. Learning how to trade successfully can take time, and making a profit is a gradual process. And, as the cryptocurrency market is not currently regulated, this means governments could potentially impose restrictions or bans at any time - so stay ahead of the curve. 

Please note that the information in this article is provided as guidance and not as direct financial advice.

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