Going Short: How Traders Profit From a Declining Cryptocurrency

The cryptocurrency market is
incredibly volatile and the sheer quantity Of different assets and trading options
provides a wealth of opportunities For astute traders. Though blue chip cryptocurrencies have
demonstrated a long term bullish trend. This is rarely without interruption. Indeed, most cryptocurrencies experience
extended periods of decline during a bear Market and can even draw down in value
in a bull market. Because of this, traders opt
to trade on the short side, Predicting which cryptocurrencies
will decline in value And netting a potentially handsome profit
if correct. Given that it is not uncommon
for cryptocurrencies to lose upwards Of 99% of their value
during a bear market, shorting can be An incredibly lucrative endeavor,
provided that it is executed correctly. Nonetheless, many cryptocurrency Investors are unaware of how to profit
from a declining cryptocurrency. And with that in mind, we'll look at seven
methods that traders use to short A cryptocurrency. These are listed in order of difficulty, Starting with the easiest
and moving to the most difficult. So timestamps are down below. So if you're new to trading in crypto,
consider Sticking with these simpler options
until you've got a good grasp of things. With that said,
my name is Trevor with CMC. This is not financial advice whatsoever
and let's dive right in. First, let's start
with the trade/short/inverse down tokens So Short, Also known as inverse or down
tokens are by far The simplest way to profit
from a declining cryptocurrency. These tokens are designed To move in the opposite direction
to an underlying cryptocurrency. So for example,
you might have a short token Designed to track the price of Bitcoin
if Bitcoin's price decreases The short Token's
price will move in the opposite direction. It will increase, and this allows short
token holders to profit

When the associated asset is declining. Vice versa.
If the price of the associated asset Increases,
the inverse token will lose value. These use a variety of mechanisms to track
and invert the price Of an associated asset. Generally, using a combination of Oracle
price feeds and a smart contract logic To track the price of an associated asset
and modify the token Price to provide holders with a negative
one X exposure to the price change. Inverse tokens are also available
in leverage flavor. These provide leverage exposure
to the inverse of an underlying assets Price movement. So, for example,
if Bitcoin loses 10% of its value, Then a 3X bitcoin bear
token would gain 30%. These generally use a rebalancing system
to ensure that they maintain The correct exposure to the underlying
asset at the expected leverage over time. Sure, tokens can typically be bought
and sold on both Centralized
and also decentralized exchange platforms. Just like regular tokens,
they do not need to meet margin Or collateralization requirements
and also do not have liquidation risks. Unfortunately,
just a handful of short tokens currently Exist
and most suffer from limited liquidity. Because of this, a few cryptocurrencies
can be shorted in this way. Binance is currently one of the few
platforms to support down tokens. Next, let's talk about prediction markets. So cryptocurrency prediction
markets are platforms that allow users To wager on the outcome of future events
such as the Bitcoin price Reaching $100,000
by December 31st of 2024. These platforms provide
an array of markets That users can participate in
and also decide whether they agree Or disagree
with the outcome specified in the market. Details. So consider this example. The price of Bitcoin will be below $20,000
by midnight on July 1st of 2023. Users can choose if they agree
with this prediction by buying. Yes shares in the market or disagree
with the prediction by buying new shares

In the market. And the price of each share depends
on the ratio of participants on each side. For a simplified example,
if 30% of the participants agree With the outcome and buy yes shares,
the price of a yes share might be around $0.30, reflecting the perceived 30% chance
of Bitcoin's price Being at below $10,000
by the end of the year. Conversely, the price of a new share
might be around $0.70, reflecting The 70% of participants who disagree
with the prediction and believe Bitcoin's price will be above
10% by the specified time. This dynamic pricing allows market
participants to express their belief In the likelihood of the outcome
and potentially profit from it If their prediction is correct. Once the specified time
and the date of the market are reached, The market is automatically resolved
in those holding. Winning shares will win. Assuming they are paid $0.30 per share, they would
then be paid down $0.70 per share, Ignoring any fees while the losers
would lose their entire wager. Now let's talk about
contract for difference. A contract For difference or CFD as a powerful
financial instrument that allows traders To capitalize on cryptocurrency price
movements by going either long or short. As the name suggests, CFDs
are financial contracts That pay
the differences in the settlement price Between the opening and closing trades
and contract for difference. Essentially, they allow traders to profit
from the price movements Of an underlying asset Such as cryptocurrency,
without actually owning the asset itself. This makes them suitable for traders
that don't want to deal With the complexity of trading, managing
and or storing of cryptocurrencies. And this makes cryptocurrency Trading more accessible
to those with a limited starting capital. CFD trading is a relatively simple way
to trade directional price movements. So for example,

If you believe that Bitcoin's price will fall,
then you'd want to sell a Bitcoin CFD. Let's say that you sell one
Bitcoin CFD at $29,000 And then the price of Bitcoin falls
to $25,000 And you want to exit your position
to lock in your profit. You then close your position Buying the CFD back and locking
in the $4,000 difference as profit. And this would probably be a bit less
with fees. Conversely,
if the price of Bitcoin is above $29,000 By the time that you close your position, You'd incur a loss equal to
the closing price minus your entry price. Cryptocurrency CFDs Are typically traded through online
brokerage platforms and CFD providers. In most cases. These brokers will also provide access
to a broad range of financial markets. Today, there are dozens of cryptocurrency
CFD trading platforms And some of the best known
include eToro and also IG. Now let's talk about binary options. Cryptocurrency Binary options are simplified
financial derivatives That allow traders to make a prediction
on whether they believe an asset Will go up or down in value
by a specified time in date in the future. In binary options trading, you predict
whether an asset price will rise or fall Within a set time. If correct, you receive a fixed payout
and if wrong, you lose your investment. Traders looking to profit
from the decline of cryptocurrency Would execute lower options. These provide traders with a fixed payout
when the option expires If they are correct in their prediction. This kind of option is frequently referred
to as a high low option, And there are dozens of binary options
Trading platforms supporting most popular Cryptocurrency pairs. Binary options are different
from typical vanilla options In that they are simply all or nothing
trades.

Binary options are usually European style,
hence They can typically only be exercised
at expiration. Unlike American style vanilla options
which can be exercised at any time Prior to expiration,
some more advanced cryptocurrency traders May choose to trade regular options
since they provide increased Flexibility and can facilitate
more complex trading strategies. Now let's talk about margin trading. Currently, one of The most popular ways To trade cryptocurrencies on the downside,
margin trading allows traders to borrow Funds from a third party
such as an exchange or liquidity provider To open larger positions
than their balance otherwise allows. Using leverage, The way it works is simple To borrow
funds, You need to hold a certain amount of funds
in your margin account. Then you can borrow up to an agreed amount
from the lender to open your position. This could be up to one extra margin
in some cases, Allowing you to open positions
much larger than simple spot trading. This method amplifies potential profits,
but also potential losses Since your margin
will be used to repay the lender. If your position runs too far
into the negative in return For borrowing funds from the broker
or other lender, you will typically need To pay margin interest, Which is deducted from the profits
when the trade is closed. Margin trading can be used to profit From a declining cryptocurrency
through the process of short selling. The way it works is simple If you expect
a cryptocurrency to fall in price, You can borrow $10,000 worth of the asset
from your broker Before selling it immediately. If the asset then declines in price
by 20%, you can then buy the same amount Back for $8,000, repay your loan
and pocket the difference as profit. Those cryptocurrency exchanges will offer
a simplified leverage trading interface To enable you to short cryptocurrencies
using margin trading, Keeping the mechanics of buying the asset
signage it

It and repaying back the loan
behind the scenes. Now let's talk about perpetual futures. Cryptocurrency Futures are a type of financial
derivative contract that entitles The holder to buy or sell an asset
at an agreed price at an increase to date. Most cryptocurrency derivatives
trading platforms Offer a special type of futures
contract known as a perpetual future. Unlike Standard Futures,
Perpetual's can be settled at any time, Allowing traders
to make directional predictions About the market and exit their position
whenever they like. This provides increased flexibility And reduces barriers to entry
by making futures trading less complex. Perpetual futures or perps, as they're
also commonly known, are a staple Among inexperienced cryptocurrency traders
due to their unique properties. Perpetual futures allows traders to go
long or short in their chosen market. They are leveraged
positions, enabling traders To increase their exposure to the market
when working with limited capital. Some exchanges and markets
can support up to 100 X leverage to open a short position
using cryptocurrency perps. You typically select these sell
or short options on your chosen Platforms trading interface. The exchange will then sell the contract
in, initiate a short Position to lock in profits
or accept any losses. The trader would
then need to buy back the contract And click the close option
to lock in their profits or loss. When trading perpetual futures, Traders should be aware of the unique fees
associated with this type of contract. These include the standard maker or taker
fee, as well as a funding rate. Leverage fees. And in some cases a settlement fee. Now let's talk about DeFi Short selling. As we Previously touched on, it's possible
to use margin trading to easily Short sell a cryptocurrency
to profit from its decline.

This involves taking out a margin loan
and then opening a short position On a cryptocurrency it via a broker
or margin trading platform. DeFi short selling is a very similar,
albeit slightly more involved process. The concept is nearly identical
and that you borrow the cryptocurrency That you want to short Sell it and then rebuy it at a later date
to pay off your loan. But instead of using a broker,
you take out a loan Using one of the myriad defi
lending platforms. So here's how it works in practice. Number one, select
the cryptocurrency that you want to short. And number two, borrow X amount of the cryptocurrency
from a supported open lending platform. Then three, sell the cryptocurrency
on a centralized or decentralized exchange And then four. Wait until it falls in price
and then five. Rebuy X amount of the cryptocurrency
and pay off your loan. The benefit of DeFi short selling
is that you can profit from declining Digital assets that are not supported
on margin or derivative exchanges As long as the asset is available
to borrow via One of the numerous DeFi
lending platforms. Then you can shorten. Now, bear in mind, borrowing Digital assets via
these platforms can be more expensive Than margin trading, and there are DeFi
specific risks to contend with, Such as smart contract exploits
and also black swan events. So are you going to be going short? Let us know in the comments below. That's all we have for this one.
We'll see you guys in the next one.