What is shorting in crypto? Shorting in crypto means trying to profit from a price decline. Instead of buying and hoping the price rises, you take a position where you make money if the price of a coin falls. This can be interesting in a declining market, but it also comes with additional risks, especially because crypto can move quickly and some forms of shorting involve leverage. In this article, we explain what shorting is, how it works, and why people do it. You will also learn about the different ways to short crypto, how to approach it step by step, and which risks you should fully understand before getting started.

In short

• Shorting means making a profit when a price falls.
• You earn from a decline by “selling” at a higher level and buying back later at a lower price.
• If the price rises while you are short, you make a loss. This loss can exceed your initial investment.
• Methods include margin trading, futures (perpetuals), and options.
• Main risks: extreme volatility, liquidations, leverage effects, and funding costs.
• Shorting is used for speculation or as a hedge for a portfolio.

How does shorting work?

The core of shorting is simple: you bet on a decline. The mechanism differs per method, but the idea remains the same. You try to profit from the difference between a higher price now and a lower price later.

How do you profit from a decline?

A simple way to understand it is through the “sell and buy back” principle. Suppose a coin is worth €100 and you expect it to drop. You open a short position at €100. If the price falls to €80, you can close the position with a profit, because the €20 difference per coin works in your favor. With traditional short selling, you sell borrowed coins and buy them back later. With derivatives, you open a contract that increases in value when the price falls. In both cases, the result is similar: a decline benefits your position.

What happens if the price rises?

If the price rises while you are short, you incur a loss. That sounds logical, but the risk is that losses can increase quickly. With a long position, the maximum loss is usually your investment, because a price cannot fall below zero. With shorting, it is different: a price can theoretically keep rising indefinitely. This means a short position can, in some cases, lead to very large losses. With leveraged derivatives, there is an additional factor: if your margin is insufficient to cover losses, your position can be closed automatically. This is called liquidation.

Why would you short crypto?

People usually short crypto for one of two reasons: speculation or protection. Speculation: You expect the market to fall (for example in a bear market or after negative news) and want to profit financially. Protection (Hedging): You hold crypto for the long term but expect a temporary decline. By opening a short position, profits on your short can offset losses on your holdings.

Ways to short crypto

There are several ways to short crypto. The method you choose depends on your experience and risk tolerance.

Traditional short selling

This often happens through margin trading. You borrow coins from a platform, sell them immediately at the current price, and hope to buy them back later at a lower price to repay the loan. You usually pay interest on the borrowed coins.

Derivatives such as futures and perpetuals

Futures and perpetuals are contracts where you do not own the underlying coin. A perpetual swap has no expiration date but uses funding fees: periodic payments between long and short positions to keep the contract price close to the spot market.

Options

With a put option, you buy the right to sell an asset at a fixed price. Your risk is often limited to the premium you pay, which can make this an interesting (but complex) method for managing risk.

Shorting step by step

Shorting without a plan is risky. Follow a structured approach.

Choose your coin and define your plan

Decide why you want to short. Is it a short-term trade based on momentum, or a longer-term hedge? Look at technical indicators, volume, and news. Define your exit strategy in advance: at what point do you accept you were wrong?

Choose your method and set your position

Select the instrument that fits you best. With derivatives, pay extra attention to leverage. A position that is too large can lead to full liquidation of your margin even after a small price increase.

Manage risk and monitor your position

Always use a stop-loss. Monitor your position actively, as crypto can experience a “short squeeze”: a rapid price rise that forces short sellers to close positions, pushing the price even higher.

Closing your short position

Set profit targets in advance. In a volatile market, a profitable short can turn into a loss within minutes. Stay disciplined about taking profits.

The risks of shorting

Shorting is significantly riskier than simply buying and holding crypto.

Unlimited losses and liquidations

Unlike going long, where your investment can drop to zero, the price in a short position can theoretically rise indefinitely. Without a stop-loss, losses can be unlimited.

Leverage, funding, and fees

Costs such as borrowing interest and funding fees on perpetual contracts can eat into your profits. If the market moves sideways, you may slowly lose money due to these costs.

Volatility and news risk

A single positive tweet or ETF rumor can push the market up 10%. Short positions are extremely vulnerable to such unexpected price jumps.

The advantages of shorting

• Profit from declines: You can potentially earn in both bull and bear markets.
• Hedging: It offers a way to protect your portfolio without selling your coins.

Frequently asked questions

What is shorting stocks?

This works the same as with crypto: borrowing, selling, and later buying back cheaper. The main difference is that stock markets are often less volatile and have fixed opening hours.

What is the difference from going long?

When you go long, you buy an asset expecting the price to rise; your risk is limited to your investment. When you short, you bet on a decline; your risk is theoretically unlimited (without a stop-loss).

Is shorting easier than going long?

No. Markets historically have an upward bias. Shorting requires more precise timing, more active management, and strong discipline to handle the higher risks.

Want to get started with crypto?

At Coinmerce, you can easily and safely buy crypto using iDEAL. It is often wise to first learn the basics of the market before moving on to more complex strategies such as shorting.