The conventional strategy of cryptocurrency investors is to buy low and sell high, taking advantage of big increases in the value of the crypto assets. In 2021, Terra (LUNA) and Solana (SOL) were two of the best performing crypto-assets returning over 10,000% to investors who got in early. In this blog post, we are going to discuss how you can also profit from downturns in the crypto market using the European broker Etoro.
Short selling is a common strategy used by investors in the stock market to bet on the price of a stock falling. This strategy can also be applied to cryptocurrencies, when you open a short position on a crypto-asset you will profit when the price of that asset decreases and you will make a loss if the price of the asset increases.
When you buy a stock (long position) your losses are limited to what you have invested. If I buy 1 Tesla share for $1,000, then my losses are limited to this $1,000. This is not true when you are short selling. If I sell 1 share of Telsa (short position), theoretically there is no limit to the possible increase of the price of Tesla and as you lose money when the price increases, there is technically no limit to your losses even though there will be certain constraints to how high the Telsa share price could go.
Why would you want to implement a short sale strategy for crypto?
The crypto market is incredibly volatile, it is not uncommon to see prices rise and fall by 10-50% even in the space of a single day. There are common trends we see over and over again that could potentially reap you some profits if you are prepared to adjust your strategy from time to time from being a long term investor to a short term swing trader.
One common repeating trend is that crypto projects often rise in anticipation of a new release, new upgrade, new partnership etc. An example from recent memory was the release of Smart Contracts on Cardano which resulted in the price to pump to $3 in September of 2021 and once this catalyst had passed the price plummeted over the following months and now sits at a price of $1.06 at the time of writing.
If at the time you had recognised that Cardano was overbought you could have implemented a short strategy to profit from the inevitable price fall. This strategy is not without its risks, as it requires a certain amount of timing.
Can you Short Sell Cryptocurrency on Etoro?
On the Etoro, you can ‘Sell’ any of the crypto-assets which are listed on the trading platform, which will open a short position on that asset. In certain regions, you will be able to add leverage of up to X2 on crypto-assets also which will further magnify any potential gains but also magnify the losses.
How do you execute a short sale on Etoro?
Let’s now go through how you can execute a short sale of crypto-assets on Etoro. If you want to bet on the price of a certain crypto asset decreasing you can open a short position by selecting the ‘Sell’ option.
For unleveraged short positions, you will be required to deposit 100% of the cost of opening the trade.
What are the fees on Short Selling Crypto on Etoro?
There are 2 costs to short selling on Etoro – there is the initial spread charged and overnight fees. Let’s now look at both of these in more detail.
Spread: Every crypto on Etoro will have a different price depending on whether you are buying or selling the asset. The difference between the price at which you can buy and sell the crypto-asset is known as the spread.
If we look at XRP for example, at the time of writing you could Buy 1 XRP token for $0.6229 and Sell 1 XRP token for $0.6070. The difference of $0.0159 is the spread that Etoro takes as a fee. This spread will vary from asset to asset and can change during volatile market days.
Historically the spread on XRP has stayed around 2.45% on Etoro. You can also see the spread on other popular crypto-assets in the below table.
Overnight fee: when you hold a short position overnight it will be charged a small fee. For crypto-assets, this fee is charged 7 days a week and will depend on how much you are investing. From the below screenshot you will see that a $1,000 short position on XRP will be charged an overnight fee of $0.41 for every day the position is open.
How do you manage the downside of your short positions on Etoro?
As mentioned previously when you are shorting crypto there is theoretically there is no limit to the losses. What can you do to protect yourself from increases in the price of the crypto that result in you making a loss?
When opening your short position on Etoro you can set a stop loss level where the position is automatically closed and prevents you from making further losses. It is also possible to set a trailing stop loss that sets the stop-loss order at a fixed percentage above the current market price.
It is possible to profit from the fall of the crypto markets by opening short positions, but investors should be aware of the risks and be prepared to manage them appropriately by setting stop losses. Timing the fall of crypto can be difficult unless you can clearly identify that it has been overbought. Etoro is a useful brokerage for executing these trades despite having large spreads compared to competitors.
This blog post is for informational and educational purposes only and should not be construed as financial advice.