How To Short Ethereum

Last Updated: July 19, 2022
Let’s take a look at how to short Ethereum.
How To Short Ethereum
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Gamestop’s latest saga only known as ‘Short Selling’, which was only understood by professional financers, has entered into popular imagination; since then, almost everyone else has been following suit.

Overall, the goal here is fairly easy to understand – the goal here is to try and profit an asset’s value once it plummets.

Additionally, the method is simple to understand and execute – all you need to do is first purchase the asset, sell it at the market price, and then buy it again once its value falls.

You will notice the difference when you hand it back to the lender. 

Many prominent exchanges allow for such actions on Ethereum. If you are one of the day traders that is looking for some thrills related to increased risk, you will particularly be fond of the leveraged short trade.

However, there are some downfalls as well that you should be aware of before you opt for this.

If you are not careful, this margin could get you REKT.

Shorting ETH Using Margin on Exchanges

Shorting ETH Using Margin on Exchanges

If you want to facilitate an asset’s loan, a deposit will be charged by the concerned exchange.

Of course, the level of leverage (margin) will depend on the size of the deposit; it will also multiply the quantity of the asset that can be controlled by you.

For instance, you will have to borrow five times the value of the deposit if you pay a 20% deposit.

However, you will also be liable to cover the same amount when the trade closes out. 

While this is definitely good news, it could also be bad news. While you will significantly magnify your gains at least five times, you will also suffer equal losses.

There is a particular reason why there are two movies ‘Margin Call’ and ‘The Big Short’.

Now, let us learn more about it in this article. 

How To Short Ethereum On Binance Margin Trading

With the help of the Binance Margin Trading platform, you should be able to short Ethereum on Binance.

Let us look into how to do so below:

  1. The first step you need to get done with is opening an account on Binance; if you already have so, you can skip directly to the next point. 
  2. You can now start depositing the funds; you can either deposit the Ethereum coins directly or make use of currency and exchange them for the ETH coins. 
  3. From the spot wallet, you have to transfer the funds to the Margin wallet. 
  4. Head over to any market pair of Ethereum and a stable coin; for instance, you can opt for ETH/BUSD or ETH/USDT.
  5. Once you have successfully transferred the cryptocurrency to the Margin Wallet, these coins can be utilized as collateral if you want to borrow some funds. The number of funds that you can borrow will be determined by the balance in your Margin Wallet. In most cases, the rate is fixed at 5:1 or 5x.
  6. With the debt and the accrued interest rate, you now have the option of trading the borrowed funds. You should also know that the rate of interest keeps updating automatically after every hour. 
  7. All you have to do now is select the appropriate ETH pair and the shorting amount. Finally, tap on the Margin Sell ETH.

How To Short Ethereum On Binance Futures

Short Ethereum On Binance Futures

You also have the choice of shorting various altcoins as well as ETH via Binance Futures; let us look into how you can do so below:

  1. First, you need to head over to Binance Futures. 
  2. Here, you need to choose between two futures contracts – quarterly and perpetual futures contracts. 
  3. You can read the Binance Futures guide if you want to gain more clarity and understanding about the working of this platform. 
  4. Once done, you need to choose the right Ethereum pair; additionally, the leverage can also be adjusted up to 20x.
  5. Finally, you will have to open the contract.

Taking a Short by Going Long Elsewhere

Taking a Short by Going Long Elsewhere

One of the best ways to ensure that you get the benefits of the anticipated drop in price is to hold something, like cash, and purchase the asset at a very cheaper rate even before the general public gets access to derivatives trading and other options.

As for now, one useful idea is ‘going long somewhere else’ for trading in cryptocurrency because of the high volatility as well as a lesser requirement for leverage. 

Let us now understand thoroughly how it works. If you want to stack Sats, it is suggested that you observe the Ethereum coins; you will notice that when stacked against Bitcoin, it is historically weak.

With the help of Bitcoins, you would purchase Ethereum; next, you would have to wait for its value to climb above Bitcoin.

Then, you will have to purchase more Bitcoins. This means that the Sats will be stacked and your job is done. 

Before we get into more details, let us first understand something else. If you have had the option to invest in cryptocurrency this year, doing it the right way can easily multiply your investment by 10x. 

In fact, the multiplier can go as high as 100x, which means that you can easily convert $100 into $10K.

According to what experts have to believe, this marvel will take place again in 2022.

However, the question remains – which is the best cryptocurrency that you can invest in?

If you are looking for the answer, you can head over to WhaleTank; here, the members work day-in and day-out to help you find the best choice on the market. 

Now, let us get back to the main topic. As you can see, the process is not very risky since all the assets will go to zero.

However, the only danger here is for your bankroll, which will be on a leveraged trade.

Ideally, the risk here is that you will not be able to make the same number of gains that you would have simply by not trading.

While this can be quite hurtful, it will not wipe you off completely. 

Losing More Than Your Deposit

Even in the case of your trade going against what you have expected, the amount that you will require to cover these losses will increase quickly.

Here, you will have two choices – to lose your entire bankroll if you choose to cut and run or continue trading by importing more funds.

This option is the worst nightmare for almost every crypto trader today and is referred to as the Margin Call. 

Let us take the example of a helium balloon that will keep rising continuously; in such cases, would you rather keep holding on to it in hopes that it will land someday?

Or, do you choose to let the balloon go?

Overall, the idea behind Margin Call is that you should never bite off more than you can chew. 

Unlimited Downside

Unlimited Downside

Now, this is a warning that you should never consider lightly.

As most cryptocurrency experts and traders already know, you will have many benefits if you have the right cryptocurrencies.

Shorting, on the other hand, can also cost you a lot of money. This means that the downsides are nearly limitless. 

Let us take a simple example.

Let us consider that the shorted Ethereum coins witness a $10 increase on its spot price, and you have a 5:1 leverage, there will be a downfall of $50 on the value of the trade for each controlled Ethereum coin.

If there is an increase of $10 more, you will have to pay $50.

This phenomenon will keep continuing until you close down the trade; or else, the Margin Cell will keep consuming your money until you have nothing left. 

Now, let us consider a scenario where things go extremely wrong – consider that the price of the Ethereum coins increases from $1600 to $2600, you will get $5000 (5 x $1000).

However, you will also keep losing five times the amount that is raised by the spot price, until you close the trade, of course.

Leveraged shorts can reward you tremendously; however, the downfalls are equally upsetting as well. 

The Bottom Line

When it comes to risks, both short and long trades are not so different from one another. The only factor that supercharges the underlying risk is the leverage.

This method may work well for certain equities on the NASDAQ or DOW since the rate of fluctuation does not differ more than a percent or two over a span of a few days. 

In the case of crypto coins where the percentages can hit double figures in a blink of an eye; therefore, leveraged shorts should only be used for riskier profiles.

While it is possible for you to lose thousands even for a bathroom break, there is always a possibility that you may earn back that amount and even more while sipping on your coffee. 

Bankroll management is very important in such kinds of leveraged shorts gameplay.

You need to focus your attention on the live trades and never forget to place stop losses if you decide to go for a snooze.

Always remember that the crypto market is one of those that never sleeps.

FAQs

Here are some common FAQs related to this topic:

Can I Short ETH With Leverage?

Of course, you have the choice to short with Ethereum coins; however, this will also depend on the exchange you are using.

For example, Kraken and Binance will allow you to leverage shorts for Ethereum coins.

However, if you live outside the US, you can opt for options like Bitfinex and Poloniex. 

Does Ethereum Short Selling Require ID?

For higher leverage, you will have to provide ID proof; overall, the requirement of an ID will depend on where you are trading.

Today, all brokers and exchanges are compliant, which means they need to follow all the requirements of KYC.

If you opt for a reputable exchange, you (the account holder) may also have to undergo a test to show that you have a basic understanding of leveraged trades and their other aspects. 

How To Short Ethereum On A CFD Trading Platform: The Advantages

When you go to any broker, you will be offered the Contract For Difference (CFD) derivative trading.

With the help of this contract, you will be able to trade at the same price rate of the asset, without having to hold it.

On the other side of the trade, the broker will make his/her earnings on the spread. Of course, there is also the availability of leverage at 5:1 ratio.

All you need to do is look around and choose the tightest spreads. 

Can You Short On Coinbase Pro?

Unfortunately, you can no longer be able to short on Coinbase Pro.

This feature was canceled in 2020; the Commodity Futures Trading Commission sent a recommendation for the same. 

Can I Short On Binance?

Yes, there is definitely a chance for shorting on Binance. All you need to do is perform well in the competency test to show that you know your basics about leveraging.

Once done, you will soon be able to short sell as well as leverage trade.

As mentioned above, you will also have a choice of several pairs if you want to trade for Ethereum coins. 

Why Short Selling Is Bad

As we have discussed previously, shorting can be defined as leverage that is often riskier to trade; however, this risk is easily manageable, which is why leveraging cannot be considered a poor trading strategy.

However, the only issue that you will have to deal with here is that shorting can cause bad consequences in the real world. 

Shorting can be considered predatory because it is always in the interest of the person who is shorting if the asset fails.

There are several cases of money managers that utilize such trades and then talk down about the pricing of the stocks for profits. This is a very bandit-like behavior. 

Overall, the idea here is to eliminate a company’s share price so that there is no harm to its fundamentals. This way has been used to decimate real jobs and companies.

The worst part of this problem takes place when traders short more portions of the asset than what actually exists.

Since the asset is bought and sold in shorting, this process is done fairly quickly and easily; then, the asset can be purchased again from the new owner in another trade. 

While the regulations of the SEC forbid such actions, the rules are simply not enough to contain this problem.

The only way to fight this issue is by using an immutable ledger that is capable of tracking the status of any cryptocurrency or share. 

As previously mentioned, Gamestop shorted nearly 140% of its stock; this is where the downfalls of shorting come into play.

You will never find enough shares to settle and get done with the contracts.

Hence, the price and scarcity will only keep increasing and will eventually cripple these traders.

Once realization has dawned on these traders, they will start purchasing; this endless loop is known as a short squeeze. 

Of course, there are many arguments about shorting. However, the way people are going about it is very questionable.

We hope a system is soon put into place to ensure that the process is more reliable and transparent.

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Written by Thomas McGovern

Thomas has over a decade of experience with blockchain and cryptography. He writes regularly for EarthWeb and holds a M.S. in Mathematics.
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