How to Short Ethereum?

Short-selling, also referred to as shorting crypto, is an advanced type of crypto trading tactic used by experienced traders who know how to read the market and profit from bearish market conditions when crypto prices are falling. 

This guide will help walk you through the essentials of crypto shorting, focusing on how to short Ethereum.

Short-Selling Crypto

In classic spot trading, users buy a certain amount of crypto and then trade their assets using different strategies. The most common one is to buy crypto when its price is low and then sell it when the price increases. 

You can also sell crypto at its current market price and repurchase it when it drops. However, for beginner crypto traders, it’s impossible to accurately estimate whether a crypto’s price will rise or drop soon. That’s why many average crypto investors just buy and hold crypto, hoping for a price increase.

When you’re entering a trading position with an estimate that a specific crypto will rise in value, you’re going long or opening a long position. When your estimate is that the price of an asset will soon drop, you’re going short or short-selling. 

To enter a short position, you need to sell an asset and then buy the same amount of that specific asset once its price drops down to your estimated profit-taking level. When you buy the asset back, your profit equals the difference between your initial selling price and the new, lower buying price. 

This means that contrary to investors waiting for the crypto market to go on a short or long-term uptrend to sell their crypto for a higher price, you’re waiting for a market dip or downtrend to take profits. 

Shorting originates from stock trading, where investors borrow stocks from a broker, sell them, and then wait for the price dip to repurchase them and return them to the broker. In crypto, traders do this through leverage. 

Many crypto exchanges offer leveraged trading services for margin and futures trading by lending out funds to users based on an initial collateral deposit. Depending on the platform, you might enter anywhere between 2x to 100x leveraged positions, and many pro traders use these services to short cryptos such as Ethereum. 

The main issue with shorting crypto is that it’s very risky, and if you aren’t thoroughly acquainted with how the crypto market works, you’re essentially just betting on a price decrease of an underlying asset. 

Benefits of Shorting

• If you play it right, shorting crypto is a much faster way to earn considerable profits compared to just holding crypto in your wallet in the hope of a significant price increase over time. 
• Shorting crypto is an excellent way to make the most out of the bear market and profit from the crypto market’s general downtrend. Instead of putting your money on crypto price increases, you’re actually in a position to take profits while many traders are selling their crypto below their buying price to save a portion of their investments. 
• Many trading platforms offer up to 50x or 100x leverage on margin trading or futures contracts. You can use these services to enter short positions of a much higher value than your initial funds. 
• Shorting crypto is a valuable tool for curbing crypto volatility if you combine it with long positions. If you close some successful short positions and take profits, those profits will help you limit potential losses from unsuccessful long positions. 

Risks of Shorting

• Cryptocurrencies are very unpredictable and volatile assets, with significant price fluctuations in short periods. Their price can change several percent in a couple of hours, and your short position might go sideways quickly. 
• If you borrow funds from a trading platform to enter a leveraged short position and the trade doesn’t go as you planned, you can quickly lose your collateral. Essentially, if the price of your short position changes more than the value of your collateral, the trading platform will initiate a margin call that requires you to deposit more collateral to sustain the position. If you fail to do so or decide to close your position, you’ll lose the entire collateral.
• Engaging in short-selling crypto without considerable knowledge about technical analysis, price chart patterns, and price indicators will quickly lead you to significant losses and frustration. This trading method definitely isn’t for beginners. Even experienced traders suffer sudden losses when shorting.
• Sometimes, unprecedented real-world events that influence the price of crypto can happen, triggering a major price change in the opposite direction of your short position, quickly leading you to losses.

The Role of Technical Analysis in Shorting Crypto

If you’re a crypto newcomer and want to start shorting crypto right away, it’s almost certain that you’ll quickly incur considerable losses. That’s because beginners lack the technical know-how regarding how the crypto market works and how to use technical analysis to find a potentially profitable shorting opportunity.

No one can predict a cryptocurrency’s price fluctuations with 100% certainty, but with the help of technical analysis tools, traders can considerably lower the risk of all types of crypto trading, including short-selling.

Technical analysis is done on an advanced trading interface on a cryptocurrency exchange platform like Binance. These interfaces have detailed price charts where you can view the price fluctuation of selected crypto during the last hour, day, week, month, and year.

Next to the price chart, there are dozens of different tools, such as price change indicators, trend indicators, Gan and Fibonacci pattern tools, prediction and measurement tools, price pattern shapes, and more. 

Beginners have no idea what these tools are and how they work, but their role is crucial for making informed trading decisions and knowing when to open or close a trade. When you learn how to read and analyze crypto price charts, you’ll be able to recognize possible price trends and chart patterns and estimate the potential price change direction of cryptos. 

Without sufficient technical analysis knowledge, you might enter a short position because Ethereum was trending downward recently and then lose your entire trade because you didn’t recognize the price chart pattern that was signaling a potential ETH price breakout.

To prevent scenarios like these, you should carefully study technical analysis before entering your first short position. Many websites, such as the Binance Academy or ByBit’s educational section, have thorough articles and tutorials for beginners. 

Popular Short-Selling Methods for Ethereum

There are multiple popular methods for shorting crypto. Let’s take a look at the most practical ones you can use to short Ethereum and other digital currencies.

Margin Trading Short Positions

Margin trading is by far the most popular solution for shorting crypto because it includes leveraged trading options. When going short, you use a crypto exchange’s margin trading service to borrow crypto from the platform, which acts as a broker. Usually, you need to deposit fiat currency or a stablecoin as collateral to get a specific crypto, such as ETH, as a loan.

Once you receive the loan, you open a short position by selling the borrowed assets at the current average market rate. Then you need to wait for the underlying crypto’s price to fall, according to your estimates, and if it does fall, you can take profits by buying the exact same amount of that crypto you’ve initially sold.

All you need to do now is repay the borrowed assets with interest, and you can pocket the price difference. Many margin trading services have an Auto-Repay Buy option that facilitates the whole operation when you want to take profits.

However, the platform also needs to protect its brokerage service. So, if your leveraged short position goes in the opposite direction and the price change exceeds the value of your initial collateral, the platform will liquidate your position and close it. The higher the leverage multiplier, the less your short position tolerates price increases. 

Futures Contracts

While margin trading usually offers between 2x and 10x leverage, futures trading can multiply your gains (and losses) by up to 100x on some trading platforms. Also, you don’t need to own the asset whose futures you’re trading.

Instead of buying specific crypto and multiplying the value of your trading position with leverage, futures contracts allow users to enter long or short positions regarding the future price change direction of an asset, like ETH. This means that futures are actually crypto derivatives because there are no crypto-changing hands.

Futures contracts can have fixed expiration dates, or they can be perpetual contracts with no expiration dates. With perpetual contracts, users just need to maintain their opened positions with sufficient collateral and take profits when the contract becomes sufficiently profitable. In the case of shorting, this happens when the underlying asset reaches your profit-taking threshold.

Contracts with expiration dates are automatically sold when they expire. Depending on your contract, you may receive profits or incur losses at the expiration date. Essentially, with these types of futures, traders agree to sell the contract at a certain date back to the broker.

If you’re adept at technical analysis, you can try to estimate the future price movement of ETH or other cryptos and then enter a leveraged futures short position with 10x, 20x, or even higher leverage.

The returns can be much higher than with shorting through margin trading, but the flexibility of your position is much more limited. Even a tiny upward price move of 0.1% may eat up your collateral and liquidate the trade. 

Contract for Difference Trading

A contract for difference (CFD) is another possibility for shorting crypto. CFDs are similar to futures because they are also derivatives products, but unlike futures, CFDs deal with all types of assets, such as crypto, stocks, commodities, and indices. A CFD is also a leveraged product like a futures contract, and users can deposit a small amount of collateral to start trading. 

Users trading CFDs don’t need to worry about the underlying asset’s actual price because what matters is only the price change between two points in time. Furthermore, unlike futures contracts which rely on crypto transactions and are available exclusively on cryptocurrency exchanges, CFDs are traded on specialized platforms that deal with these types of derivatives products.

You don’t need to buy ETH or any other crypto to short Ethereum through a CFD. Instead, you can use fiat currency on a platform that deals with CFDs, and if your CFD short position plays out well, your gains are settled in cash immediately to your bank account. 

While CFDs are pretty similar to futures contracts regarding their core mechanism, the key difference is that CFDs aren’t tied to crypto platforms, and beginners who aren’t experienced with crypto can easily use them. 

However, CFDs are extremely risky because users are essentially placing bets on the downward price movement of an asset when engaging in shorting through CFDs.

This wouldn’t be an issue for experienced crypto traders who understand technical analysis and make careful decisions based on available data, but many CFD users are average investors who are simply placing bets through CFDs. 

That’s why these types of extremely high-risk derivatives are illegal in some parts of the world, like the US, to protect users. 

Shorting With Binary Options

Another useful service for shorting crypto is through binary options. This method is also similar to futures contracts and CFDs, but there’s a twist. With futures and CFDs, traders are obliged to fulfill their end of the contract and sell the contract at a certain point, regardless of its value at that point in time. There are no such obligations with binary options.

With binary options, there are call-and-put options at your disposal. 

To go long, you need to select the call option, while put options are used to sell a contract. Binary options contracts allow users to buy or sell underlying securities at a pre-determined price during a certain timeframe. This means that you aren’t trading ETH when engaging in binary options. Instead, you’re trading with the ETH price change value, just like in CFDs and futures.

The value of a put option rises when the underlying asset’s price decreases. That’s why put options are used for shorting assets. When engaging in a put option, you need to set a strike price, which should be lower than the asset’s current market price because you want to profit from the price fall. 

The price of the underlying asset needs to fall below the strike price at the time of the contract’s expiration for your put option to be profitable. Platforms that support binary options allow traders to use them directly with fiat currency. 

Short Your Own ETH

Besides the listed methods, you can also short your own ETH. However, this is something more suitable for large-scale investors who already have considerable amounts of ETH and don’t need to depend on brokerage services for loans and leverage. 

If you aren’t comfortable with leveraged short positions because of the relatively small price change flexibility of your trades, which can result in fast liquidations, you can test your technical analysis knowledge by shorting small amounts of your ETH.

When using your own assets, you don’t need to worry about your position getting liquidated due to a small price change of a few percent. 

To do this, you should sell some of your ETH at the current market rate and then buy it back once the price drops. When using your own crypto, you need to set profit-taking and stop-loss thresholds to limit your losses and decide when to take profits in advance. While these rules also apply to margin trading short positions, they are even more important when using your own crypto.

This is a good method for beginners to try out shorting crypto once they’ve learned the essentials of technical analysis to see whether they can accurately estimate future price changes based on current data.

Just keep in mind that your potential profits are much lower when only using your own ETH compared to utilizing leverage loans for shorting.

Popular Exchanges for Shorting Ethereum

Let’s have a look at some of the most popular trading platforms for shorting ETH.

Binance

Binance is one of the top crypto trading platforms for all types of users because you’ll find basic features such as instant buying, swapping, and spot trading, along with professional-grade services like margin trading, futures, and binary options. 

The exchange supports more than 20 fiat currencies and has a fiat wallet section, which makes it easy for traders to use all of the available services by depositing cash and converting it into Binance USD (BUSD) or Tether (USDT). 

The platform has a Binance Academy section with tons of useful educational content to help you learn how advanced trading services work and how to start shorting ETH.

ByBit

ByBit is among the most significant trading platforms specialized for margin trading and derivatives products. There are numerous options for shorting ETH on ByBit. Margin trading on ByBit gives you the option to short ETH with up to 10x leverage, which is among the highest leverage threshold for margin trading.

In the derivatives section of the platform, you can access USDT or USD Coin (USDC) collateralized futures contracts, both with fixed expiration dates or perpetual versions. There’s even a copy trading option, which lets you copy the derivatives trades of best-performing traders.

If you want to engage in binary option ETH shorting, you can do so with USDC as collateral on ByBit. 

CMC Markets

In case you want to try shorting Ethereum with CFDs, you won’t find this type of service on a cryptocurrency exchange. CFDs are supported by traditional trading platforms that deal with various assets such as shares, bonds, precious metals, indices, and exchange-traded funds. Cryptocurrencies are just the newest addition to CFD platforms because of the growing popularity of crypto.

CMC Markets is a popular CFD trading platform with exceptional services in this segment. Using the platform is quite easy and straightforward. You can trade CFDs with cash, and the platform has a risk-free demo account that you can use to practice CFD trading without depositing money and then start using cash once you get the hang of it. 

OKX

OKX is another high-quality trading platform that supports a plethora of derivatives trading services, along with instant, spot, and margin trading. 

The exchange supports over 50 coins for margin trading with up to 10x leverage on all assets, including Ethereum. The real fun for derivatives traders looking for massive shorting options begins with perpetual and standard futures contracts because OKX supports up to 125x leverage. 

The exchange even has a binary options section with Ethereum as one of the top traded assets.

Conclusion

Before deciding to start shorting ETH, keep in mind that short-selling is a very risky activity, just like any type of cryptocurrency trading. However, you can lower your risks by educating yourself about crypto technical analysis and mastering essentials like recognizing price patterns and price change trends. 

Once you feel you’re ready to start shorting ETH, you can try out some of the methods described in our guide.