For experienced traders, short selling is one of the most profitable strategies to do when the market is consolidating or trending downwards.

This is because short selling is a mechanism that traders use to profit from a certain asset that is going down, where the further the asset goes down in price, the bigger the profit. 

In crypto, traders can also do this, which is why some traders always wait for corrections and publish their thoughts on social media hoping for a correction so they can utilize it using the short selling mechanism. 

If you are a new trader and curious on how to do this, then this article will teach you how to short cryptocurrencies so you can also utilize price corrections to gain profit. 

How to Short Cryptocurrencies

Short selling or short position, typically refers to a transaction regarding a derivative contract where the trader wants the price of a certain asset to go down so they can utilize the price correction for profit. 

They do this by borrowing a contract that represents an ownership of a certain asset where the price of the contract itself mimics the price of the asset underlying it. 

The contract will be borrowed from a broker at a certain price and then immediately be sold by that trader where after the sale they would receive money. 

While holding the money, they will wait for the price of the contract to go down to buy the contract again at a cheaper price than when they sold it. 

When the price of the contract goes down they buy the contract again and return it to the broker, since that contract is borrowed from them. 

From that transaction, the margin between the price where they sold it after borrowing the contract and the price where they repurchase the contract to return it back to the broker is the profit that traders will take. 

Utilizing Futures Short Contracts

In the crypto market, you can do this by using a futures contract, where a futures contract itself has two kinds of transactions, which are shorts and longs. 

Longs refers to a transaction where the trader buys a certain contract with the hope of the contract price itself increasing so they can then sell it at a higher price for a profit, just like a normal asset. 

But with shorts, the mechanism is what was described before, where the trader hopes that the price of the contract will go down so they can receive profit from it. 

In terms of future contracts, the price itself typically mimics the asset underlying it. For example, if there is a Bitcoin futures contract, then the price of the futures contract will reflect the price movement of Bitcoin’s price, or even have the same price as Bitcoin. 

Two Types of Futures Contracts

In terms of futures contracts itself, in the crypto market there are two kinds of futures contracts which are perpetual futures contracts and traditional futures contracts. 

With perpetual futures contracts there are no expiry dates so traders can hold on to their futures contracts for as long as they want. 

But with traditional futures contracts, there is an expiry date, so traders can only hold the contract until the expiry date comes, and when it comes and the trader has not liquidated the transaction then the contract will become worthless. 

Traditional futures contracts usually have three popular types of expiry dates, which are monthly, quarterly, and yearly.

When expiry comes, traders are expected to liquidate the contract whether it is standing at a profit or at a loss. Traders can also renew their contracts to a new expiry date but will typically require more management fees especially with leverages involved. 

Leverage Mechanism

Leverage is a mechanism where traders can borrow money from brokers in order to increase their transaction power when buying a futures contract. 

For example, a trader only has $100 but they can use a leverage of 100x, meaning that they can buy a contract worth up to $10,000, but their collateral will be the $100 that they have. 

So if the contract goes at a loss of 1% then the trader will be automatically liquidated at a loss, since 1% of $10,000 is $100. Their $100 will also be taken by the broker since it is a collateral for the leverage which is essentially a loan. 

It is better to be careful with leverages and understand them properly before using it as it can be a double edged sword when it comes to derivatives trading as it can give you bigger profit and also make you lose money faster. 

Conclusion 

If you are new to derivatives trading, especially futures trading, it is better to understand them properly first since the mechanism is different from regular transactions. 

Also with short sellings in the derivatives market, it is good to have a risk management plan so that your capital can be sustainable for the long term, since its high risk and typically make traders lose money fast. 

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The views expressed belong exclusively to the author and do not reflect the views of this platform. This platform and its affiliates disclaim any responsibility for the accuracy or suitability of the information provided. It is for informational purposes only and not intended as financial or investment advice.