How to Short Crypto - Morpher
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How to Short Crypto

Author Image Ovidiu Popescu

Ovidiu Popescu

How to Short Crypto

The popularity of cryptocurrency as an investment has led to an increase in the use of short selling as a strategy among investors. Short selling, which involves selling an asset that is believed to decline in price and then repurchasing it at a lower price, has become increasingly popular due to the volatility of cryptocurrency markets. The traditional process often requires the creation of special margin accounts, and keeping up a maintenance margin, and can result in losses greater than the initial investment. This method is outdated and cumbersome for investors.

In this article, we will show you a simpler and more efficient way of short selling. We will provide a step-by-step guide that shows you how to easily short cryptocurrency and maximize profits.

  • What Is Shorting and How Does It Work
  • How to Short Crypto
  • Real World Examples of Successful and Failed Shorts
  • Shorting Crypto Best Practices

What is Shorting and How Does It Work

Short selling is a strategy that allows investors to profit from falling asset prices. Commonly, the process begins by borrowing shares from a broker and selling them at the current market price. Once the price drops, the shares are bought back at a lower price and returned to the broker.

Additionally, maintaining a minimum balance, known as the maintenance margin, is required to keep the loan in good standing. If the value of the securities falls below the maintenance margin, investors must deposit additional funds or sell securities to maintain the loan.

If you’re interested in an in depth-review and mechanics of shorting you should read our post “Short Selling Explained: A Contrarian’s Guide”. 

How to Short Crypto

This section will give you a step-by-step guide for shorting cryptocurrency. As you understand how shorting works in a general sense, you are ready to try it yourself. Luckily, as technologies and financial markets have evolved, shorting also became easier. 

No longer do investors need to worry about maintaining special margin accounts, keeping up a maintenance margin, or timing their investments perfectly. With this approach, investors can now short cryptocurrencies and be protected against losses greater than their initial investment.

Choose a Reputable Trading Platform

Choosing a reputable trading platform is essential when engaging in cryptocurrency trading. It is vital to research the company’s reputation and customer service record, as well as the fees associated with trading. 

Additionally, you should ensure that the trading platform supports the cryptocurrency you wish to trade. Finally, you should confirm that the platform is secure and that you have access to advanced tools, such as charting and technical analysis, to help you make informed trading decisions.

If you are looking specifically into shorting, we recommend using Morpher. It is probably by far the easiest and safest way for you to start shorting. 

Easy

On Morpher, you do not need a margin account, nor to keep up a maintenance margin, or pay any additional interest. You can easily short the stock with the click of a button when you anticipate a decline in value. Investors simply enter the amount for the short position and click ‘sell’.

Safe

Morpher eliminates the risk of infinite losses and additional payments associated with short selling. The platform’s negative balance protection ensures that once a position is down -100%, it automatically closes, preventing losses greater than the initial investment. This stands in stark contrast to other platforms, where a position can even go down to -500% or more. This new feature offers investors more security and protects your balance.

Zero fees, 24/7, infinite liquidity, no counterparty & other unique features

High commissions, interest payments, and fees can make shorting unprofitable. For that reason, traders pay zero fees on Morpher. Also, investors can now short any asset 24/7 with no counterparty risk and infinite liquidity. This eliminates the risk of slippage, which is a common problem on traditional platforms. This is a fundamental change to how you’re able to manage risk and trade. If you want to know how Morpher is able to have these features, you should read the whitepaper

As you can see, Morpher offers a ton of advantages for traders looking to short sell crypto or any other asset. Of course, you can also choose a traditional broker. However, you will have the hassle of maintaining a margin account and paying higher fees. 

Note: Most traditional brokers have fees for shorting markets and holding positions over the weekends; Morpher does not. 

Conduct Market Research 

Once you have found an exchange and set up an account, you will need to conduct market research and find a cryptocurrency you want to short. 

Investing and trading in cryptocurrency can be complex and risky, so research is essential. It involves studying market trends, analyzing the performance of individual coins, and staying informed of news and events that may affect the market. For instance, government regulations can lead to sudden drops in cryptocurrency prices. To get an overview and stay up to date on cryptocurrency, there are a number of resources available.

1. Market Data: Glassnode, Coinglass, CoinMarketCap. These resources provide access to important metrics and market data in the cryptocurrency market.

2. Reports: The Messari Crypto Theses for 2023. Ryan Selkis, a veteran in the crypto industry, writes one of these reports every year. The report offers a great overview and outlook for 2023. The Reflexivity Research Report offers further insight with a combination of a macro overview. However, if you are completely new to cryptocurrency, it might be useful to check out this series by Bloomberg first.

3. Podcasts: The Bankless Podcast & The All-in Podcast. These podcasts offer up-to-date insight into the world of crypto and tech trends. Bankless provides weekly recaps of the latest news in the crypto industry, while All-in features conversations between four successful investors and founders. Both podcasts are available on Youtube, Spotify, and other major platforms.

4. A popular website to get ideas for short selling stocks is High Short Interest. It’s a great tool for simply assessing how bearish Wall Street is towards particular companies. There is a similar tool for cryptocurrencies. On Coinglass you can see the short interest for Bitcoin on the major exchanges.

Make Your First Crypto-Short in 3 Steps

Once you found a cryptocurrency you want to short, you are ready to pull the trigger and make your first short trade. To do so, create an account on Morpher, it is a quick and easy process. For this example, we will pick “Binance Coin”, as the platform and coin had some regulatory problems.

Step 1. The Trading View by default is set to “Buy” the asset. To bet on the asset going down, you have to click on “Sell” at the right of the screen.

Shorting on Morpher - Step 1

Step 2. Enter an amount you want to short the cryptocurrency by. We chose to short-sell the coin with an amount of “30” and 3x leverage. 3x leverage means we are borrowing funds so that we might get three times the return. Note: When using leverage, a small interest occurs of 0.060% daily.

Shorting on Morpher - Step 2

Step 3. Finally, click on “Sell Now” to short Binance Coin. We are shorting at a price of 277.33 with a leverage of 3.0x. Hopefully, the price will drop further, so that we can make some profit. 

Shorting on Morpher - Step 3

Examples of Successful and Failed Shorts

How to Profit from Short Selling: A Real-World Example

In the wake of the 2007-08 financial crash, David Einhorn of Greenlight Capital, famously shorted Lehman Brothers stock while it was trading at $25. This proved to be a wise decision, as Lehman Brothers eventually declared bankruptcy, with its stock nearly reaching $0. By engaging in short selling, Einhorn was able to profit greatly from the downfall of Lehman Brothers. 

Lehman Brothers stock crash

This real-world short serves as a great example. It shows that, with careful analysis and an eye for opportunity, it is possible to profit from the fall of a major player in the market. As the famous film “The Big Short” shows, short selling can be a powerful tool for those who know how to use it.

If you want to know more famous shorts, read our article “When Short Sellers Got it Right: 3 Famous Shorts

How to Lose from Short Selling: A Real-World Example

Tesla Inc. and its CEO Elon Musk have been a major focus on Wall Street. After going public in 2010 at $17.00 per share, Tesla’s stock price had risen to $194 by autumn 2013, leading to an influx of activist investors who decided to short the stock as they thought it was overvalued. Unfortunately for them, Tesla proved that there was a strong demand for electric vehicles, and the stock kept climbing, leaving many of the short-sellers disappointed and out of pocket. 

Tesla stock in the news

“But some analysts still say the company’s share price is a bubble on a par with foamy tech-era stocks. It is selling for roughly 600 times its estimated 2013 earnings.” – Washington Post

Over the years, this has happened multiple times. Tesla even became the most shorted stock at some point, but also left many short sellers disappointed as it continued to rise beyond the expectations of many. This serves as a cautionary example for investors to be wary of short selling, as it can be risky and result in major losses.

Tesla stock chart

If you want to know more famous short-selling fails, read our article “When Short Sellers Got it Wrong: 3 Failed Short Position

Shorting Crypto Best Practices

By now, you should already understand how to short cryptocurrencies. First, we showed you a step-by-step example of how to Short Binance Coin. Now, we will go over some best practices to follow. By following these practices, investors can increase their chances of success when shorting cryptocurrency markets.  

Diversify Your Portfolio 

One practice is to diversify your portfolio by investing in different assets. The cryptocurrency market is volatile; if a crash occurs, all currencies will likely crash together. Mostly, blue-chip cryptocurrencies like Bitcoin and Ethereum drop less than other coins; however, in general, the trend is the same. Again, Morpher might be a great help because you can also short other markets and thus diversify. 

For example, as the Fed contemplates raising interest rates, investors must be wary of the potential effects of inflation. If you believe inflation will decrease, you may choose to short gold, which is often seen as a hedge against inflation. Others may take a closer look at overpriced stocks, as they could be vulnerable to a decrease in value. Ultimately, the key is to diversify investments, thus ensuring that no single asset class carries too much risk.

However, keep this great quote from Phil Fisher in mind relating to conducting thorough research:

“Investors have been so oversold on diversification that fear of having too many eggs in one basket has caused them to put far too little into companies they thoroughly know and far too much in others about which they know nothing at all. It never seems to occur to them, much less to their advisors, that buying a company without having sufficient knowledge of it may be even more dangerous than having inadequate diversification.”

Phil Fisher

Follow the Smart Money

Savvy investors are keeping a keen eye on the movements of the big players with large asset portfolios in the market. Tracking when these firms are buying or selling a particular stock or cryptocurrency in volume can be invaluable in helping investors stay ahead of the trends.

There are multiple websites out there that track portfolios by extracting data from financial filings. For example, visit DATAROMA to see different statistics of so-called “Superinvestors” and their holdings or latest deals. In this database, you can search for companies like Coinbase, Microstrategy, or the Grayscale Bitcoin Trust, to see if big investors are long or short on cryptocurrency-related companies. 

Coinbase Global Inc.

You can go even more granular by monitoring the portfolio pages of cryptocurrency funds like Grayscale, Polychain Ventures, Dragonfly Capital, Pantera Capital, a16z, Coinbase Ventures, Binance Labs, or smaller companies like Messari

Use a Stop-Loss

Stop-loss orders are a valuable tool for cryptocurrency traders, providing protection against significant losses on high-leverage trades or those left open over the weekend. As cryptocurrency markets are open 24/7, traders using Morpher can take advantage of the stop loss feature which allows them to set an order to sell their holdings at a specific price, mitigating losses when markets move unexpectedly. 

On Morpher, you can set a stop loss by clicking the three dots menu next to the “Sell” area.

Setting up stop-loss

Here are some quick suggestions for setting a stop-loss:

  • Set realistic expectations for your stop-loss. Setting a stop-loss level far below market price may force you to remain in the trade for much longer. There’s nothing wrong with holding your positions, as long as it’s a productive wait, and you have enough capital to act on other signals.
  • Your trade may need “breathing room”, and volatile markets breed a lot of noise that makes setting tight stops ineffective. You could be trading on very good ideas while remaining too apprehensive with your stops to see any results.
  • It can be hard for some people to conceptualize risk-taking, but looking at your own history of stops can help you learn a lot about yourself. As a rule of thumb, if you’re setting stop-loss levels and are still nervous about your trades – you’re trading outside your risk tolerance.

If you want more information on how to protect your downside or take profits at the right time, you should read our article “5 Tips for Using Protective Stops: Stop Loss and Take Profit”

Be Mindful of Leverage

If you want to increase your potential gains, you can use leverage. Leverage is a powerful tool used by traders to increase their exposure to the market beyond the size of their account balance. On Morpher, you can trade with up to 10x leverage. If you don’t understand how leverage works, then you’re not going to be able to use stop-loss and take-profit levels correctly, and, as a result, you may suffer losses. We strongly recommend all leverage traders check out our guide on leveraged trading in order to fully understand the risks of high-leveraged trading.

Keep in mind to use leverage cautiously, as it can also result in the loss of capital just as fast. Always think of the wise words by Charlie Munger when trading with leverage: 

“There’s only three ways a smart person can go broke… ‘liquor, ladies, and leverage.” 

Charlie Munger

Conclusion

Overall, short-selling cryptocurrencies can be a profitable strategy for investors looking to take advantage of a declining market. This article provided an overview of the concept of short-selling with a step-by-step example. We also outlined the best practices for short-selling cryptocurrencies. Through conducting thorough market research, diversifying their portfolio, and managing risk, traders can minimize losses and maximize profits when short-selling cryptocurrencies.

Every trader should have short-selling in their arsenal of trading strategies, especially when a platform like Morpher makes it so simple. It is a real game-changer for traders who want to engage in short-selling but find the process too cumbersome on traditional trading platforms.

Now, equipped with that knowledge, we leave you with an inspirational quote to venture into the world of cryptocurrency shorting:

“The goal should be that in the middle of a storm that puts all the less-seaworthy boats at the bottom of the ocean, your boat, battered as it may be, makes it back to shore. Short selling helps you do that.”

Zeke Ashton
Disclaimer: All investments involve risk, and the past performance of a security, industry, sector, market, financial product, trading strategy, or individual’s trading does not guarantee future results or returns. Investors are fully responsible for any investment decisions they make. Such decisions should be based solely on an evaluation of their financial circumstances, investment objectives, risk tolerance, and liquidity needs. This post does not constitute investment advice.