When to short crypto

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Do you know when to short crypto? Learn to recognize the market indicators for a trend reversal and profit from a bearish downtrend.

Knowing when to short cryptocurrency can be challenging, as the crypto market is highly volatile and unpredictable. Shorting involves betting on the price of a cryptocurrency to decrease, and it can be risky.

Usually, pro traders short-sell an asset by borrowing it, and immediately selling it at the current market price. Additionally, they aim to buy it back later at a lower price and then return the asset to the lender.

Shorting cryptocurrency is risky because it means betting on its price to drop. If the price rises instead, you lose money. Market timing is crucial because you want to sell at a high price and buy back at a lower one.

If you get the timing wrong, you might sell low and have to buy back high, resulting in significant losses. Cryptocurrency prices can be highly unpredictable, so being right about when to short is vital to make a profit and avoid losing money.

Timing the crypto markets

In this article, we are going to find out what the best indicators are to know when to short crypto. Additionally, by doing this right you can also profit when the crypto markets turn south.

Finally, I want to mention that this article is for educational purposes only where I’m sharing my experience as a veteran crypto trader. Make sure to do your own research before investing in crypto.

How Does Shorting in Crypto Work?

Before I dive into indicators on when to short crypto, first some background info behind shorting. The most common way to start taking a short position in the crypto markets is by using the margin trading account which is available on the bigger exchange platforms.

Margin trading is like borrowing money to trade more cryptocurrency than you have. If you think the price will fall, you can “short” by borrowing crypto, selling it at a high price, and later buying it back at a lower price to return it. The profit is the difference.

Even though, there are some pitfalls crypto traders have to take into account. First, there is the leverage, which is great when you profit, however, it also magnifies your losses.

On top of that, you have to pay extra fees. For instance, when spot trading crypto you only pay fees for the trade you are executing. Using margin trading orders has additional fees as you are also borrowing extra money from the platform.

Finally, you have to deal with margin calls when the order goes the wrong way. Meaning, you have to deposit extra funds to be able to repay the loan.

Example of Binance Margin Account
Example of Binance Margin Account

Shorting Bitcoin a Practical Example

Below are the steps to take, when initiating a short position on the Bitcoin price:

  1. You borrow 1 Bitcoin at $50,000
  2. Sell it immediately at $50,000
  3. Bitcoin falls to $40,000
  4. Buyback 1 Bitcoin at $40,000 and return it
  5. You make $10,000 profit

How To Know When To Short Crypto?

As explained earlier, timing the markets is essential to be able to become in the volatile crypto markets. Consequently, to be able to enter a short position at the right time, advanced traders are using technical indicators and other signal tools. Below are three indicators(market signals) that are ideal moments to enter a short position in crypto.



Indicator 1: ‘Uber Bullish’ Market Sentiment

When a particular cryptocurrency or the entire market has experienced a prolonged and significant bull run, it might be a signal to consider shorting. Look for signs of excessive hype, parabolic price increases, and overbought conditions.

A good example of extended bullish sentiment is when FOMO hits the crypto markets. FOMO or Fear Of Missing Out is when prices are rising fast and more and more buyers are entering the markets to not miss out on potential profits. Additionally, it will lead to overbought market conditions where demand is at its peak.

Crypto markets: Overbought vs. Oversold
Crypto markets: Overbought vs. Oversold

Finally, crypto market sentiment becomes euphoric and detached from fundamental value. Often it is a good time to take a cautious short position, anticipating a correction or market cool-down.

Indicator 2: Bearish Divergence

Technical analysis plays a crucial role in timing when to short crypto. One valuable indicator is bearish divergence. This occurs when the price of a cryptocurrency is making higher highs while the relevant technical indicators (such as the Relative Strength Index – RSI or Moving Average Convergence Divergence – MACD) are making lower highs.

Bearish divergence is a technical analysis concept that suggests a potential reversal in an uptrend, making it a suitable time to short. Here’s a practical example:

Suppose Ethereum(ETH) price has been steadily rising over several weeks. During this time, you’ve been keeping an eye on the RSI, which measures the strength of price movements. As ETH’s price makes new higher highs, the RSI should ideally follow suit. However, bearish divergence appears when it doesn’t.

For instance:

  1. Ethereum(ETH) price reaches a new all-time high(ATH) of $3200.
  2. Simultaneously, the MACD fails to surpass its previous high and instead peaks at a lower level.
Ethereum(ETH) showing bearish divergence
Ethereum(ETH) showing bearish divergence

Indicator 3: Death Cross

A ‘Death Cross’ is another bearish technical pattern that occurs on a cryptocurrency’s price chart. It appears when its short-term moving average crosses below its long-term moving average.

The two most commonly used moving averages for this analysis are the 50-day moving average (short-term) and the 200-day moving average (long-term).

Here’s how the Death Cross works:

  • Short-Term Moving Average (50-day): This moving average represents the average price of the cryptocurrency over the past 50 days. It reacts more quickly to recent price changes.
  • Long-Term Moving Average (200-day): This moving average represents the average price of the cryptocurrency over the past 200 days. It reacts more slowly to price fluctuations and provides a longer-term perspective.

When the short-term moving average (50-day) crosses below the long-term moving average (200-day), it generates a Death Cross signal. This crossover suggests a potential shift in the trend from bullish to bearish, indicating that the cryptocurrency’s price may continue to decline.

Example of a Death Cross signal in the charts
Example of a Death Cross signal in the charts

Reasons To Short Cryptocurrencies

As most crypto traders are speculating on higher prices and are taking long positions, shorting the markets can also be a profitable strategy:

  • Valuation – Traders are short-selling a cryptocurrency when they believe it is overvalued or caught in a price bubble. Often due to factors like project announcements or market narratives. They aim to profit from the expected price correction by shorting the overhyped cryptocurrency. Fundamental analysis is recommended to determine the cryptocurrency’s intrinsic value and identify a suitable time to cover the short position.
  • Volatility – Cryptocurrency’s inherent volatility presents opportunities for traders seeking high-risk, high-reward strategies. They can capitalize on price fluctuations, going long when prices rise and shorting when prices are expected to decline. Successful traders leverage their expertise to navigate these market swings effectively.
  • Hedging Risk – Traders use short selling as a risk management tool. If they hold a long position in a cryptocurrency but anticipate a price decline, they may short the same cryptocurrency. All this to offset potential losses in their long-position. This hedging strategy allows them to potentially profit regardless of the market’s direction.
Reasons to short Crypto

In summary, short-selling crypto serves various purposes, including capitalizing on overvaluation, leveraging price volatility for gains, and managing risk in a bear market. Traders employ different strategies based on their market analysis and risk tolerance.

Best Apps To Short Crypto

When to short crypto, you have to install an app first. Most of them are mobile applications that allow users to trade and manage various cryptocurrencies directly from their smartphones or PCs. These apps provide a user-friendly interface to access cryptocurrency markets. Particularly, when you want to short crypto, you have to deposit funds in the crypto margin account.

Binance and Kucoin are prime examples of popular cryptocurrency trading platforms, but there are many more and it also depends on your local situation. However, these two platforms are reputable and are accessible to a more mainstream audience.

  • Binance(The most popular platform and well-known cryptocurrency exchange globally)
  • Kucoin(Another reputable cryptocurrency exchange with a mobile app, it allows Bitcoin trading for US residents)
Kucoin
USA(❌)USA(✔️)
Go to BinanceGo To Kucoin

How Does Creating an Account at an Exchange Work?

Creating an account at a platform like Binance is free and can be done in minutes. Overall below are the steps you have to take:

First, create an account with your mobile or email address. This is very straightforward. Next, you have to undergo the verification process(KYC). It requires the following steps:

  1. Upload official documents(passport, identity card, driving license, or else)
  2. Take pictures of both sides of the document
  3. Make a selfie

Finally, when the account is created, you can decide to add a credit card or use a bank account as a payment option. From here it’s a matter of depositing funds and starting trading 😁

Final Words

In a nutshell, knowing when to short cryptocurrency is both an art and a science. It demands a deep understanding of market dynamics and the ability to read crucial indicators. Here’s a concise summary of how to recognize the right moments when to short crypto:

  1. Timing is key – In the volatile world of crypto, timing is everything. Wait for ideal conditions, such as overextended bullish sentiment, bearish divergence, or a Death Cross, to signal potential price reversals.
  2. Use technical indicators – Leverage technical analysis tools like RSI, MACD, moving averages, and chart patterns to pinpoint entry and exit points for short positions.
  3. Risk Management – Remember that shorting involves substantial risk. Employ proper risk management strategies, set stop-loss orders, and never risk more than you can afford to lose.
  4. Educate Yourself – Stay informed and continually educate yourself about the cryptocurrency market. Understand the projects you’re trading and the factors that influence their prices.
  5. Practice Caution – While shorting can be profitable, it’s not without risks. Exercise caution, conduct thorough research, and consider starting with a small position until you gain experience.

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