Cryptocurrency shorting is a trading strategy used by investors or traders when they expect the price of a certain crypto asset to fall. The core idea is to earn the bid-ask spread by borrowing some cryptocurrency and selling it at the current market price, waiting for its price to fall, and then buying back the same amount of that cryptocurrency at a lower price, and then returning the borrowed currency to the lender.

This operation model is contrary to the traditional "buy low and sell high", and is a "sell high and buy low". Performing short operations usually requires on platforms that support leveraged or margin trading, because you need to borrow assets to perform a sell operation.

Basic concepts of shorting cryptocurrency

1. Expected asset prices to fall: The fundamental driving force of short operations lies in pessimistic expectations of the future price trend of a particular cryptocurrency. Traders believe that the market is overvalued by the asset, or there are specific factors that lead to a price decline.

2. Borrow assets: To short selling, you must first borrow the corresponding cryptocurrency from the platform or other users. The platform will provide a certain multiple of leverage based on the trader's margin level, allowing it to borrow assets that exceed the value of the funds it holds.

3. Instant Sell: After borrowing cryptocurrencies, traders will immediately sell them on the market at the current price in exchange for stablecoins or other fiat currencies. At this point, the assets held by the trader become cash, and liabilities are the amount of cryptocurrency that needs to be returned.

4. Buy back and return at a low price: When the price of the cryptocurrency falls to expected levels, traders use the cash they have previously sold to buy back the same amount of cryptocurrency at a lower price. After buying back, return these coins to the lender to complete the entire lending process. The remaining cash (selling income minus buying and repaying cost) is the trader's profit, minus interest or expenses for borrowing coins.

The specific process of selling coins

1. Choose a platform that supports short selling: Not all cryptocurrency trading platforms provide short selling. You need to choose a mainstream platform that supports margin trading or contract trading (usually including short options).

2. Open a margin account: On the selected platform, you need to open a margin trading or contract trading account and deposit a certain amount of margin. Margin is the basis for the platform to allow you to borrow coins and is also a collateral for dealing with potential losses.

3. Choose the short currency and quantity: Based on market analysis, select the cryptocurrency that is expected to fall and decide the amount to borrow and sell. This amount is usually related to the multiple of the leverage you want to use.

4. Perform a sell operation: Select the "Sell" or "Short" option in the trading interface and enter the quantity you want to sell. The system will automatically borrow the corresponding coins for you and sell them in the market as a market or limit order.

5. Monitor positions: After selling, your short positions are established. You need to continue to pay attention to the price trend of the currency. If the price falls, your position makes a profit; if the price rises, your position loses.

6. Close position operation: When the price falls to a satisfactory level, you need to close the position. The action of closing a position is to "buy" the same amount of coins sold before "buy". After buying, the platform will automatically use these coins to return the loan and settle profits and losses. Close positions can also stop losses when the price rises and causes the loss to be too large.

Potential risks of short operations

1. The possibility of unlimited losses: This is the biggest risk of shorting. If the short-selling currency price does not fall but continues to rise, theoretically, there is no upper limit for the price increase, and your losses may also be no upper limit. Your losses may be much higher than the margin you initially invested.

2. Margin additional and forced closing: When the currency price rises, your losses reach a certain level, the platform will notify you of additional margin (i.e., "Add Margin Notice"). If you fail to add margin in time, the platform may forcefully close your position (i.e. "forced closing" or "loss") to prevent losses from exceeding your total margin. Forced closing often occurs at very unfavorable prices, which will cause you to lose most or even all of your margin.

3. Cost of borrowing: Borrowing cryptocurrencies usually requires interest or other fees, which accumulate as time to borrow money increases. Even if the currency price falls, if the decline is not enough to cover the cost of borrowing coins, you may still lose money.

4. Liquidity risk: For some currencies with small market capitalization or inactive trading, there may be situations where you cannot borrow coins to short, or it is difficult to quickly buy back the required amount of coins when closing positions, especially when the market fluctuates violently.

5. Trading platform risks: Technical issues, security vulnerabilities or rule changes in the platform itself may affect the security of your transactions and assets.

6. Short Squeeze: If a large number of traders short a certain currency at the same time, but the price not only does not fall but starts to rise rapidly, this may trigger a large number of short positions to stop losses or be forced to close the positions, and they are forced to buy coins to close the positions. This concentrated buying behavior will further push up the currency price, forming a vicious cycle, resulting in a huge loss in short positions.

Risk management and precautions

1. Set stop loss: When establishing a short position, be sure to set a stop loss order at the same time. Stop loss is a preset price. When the price rises and touches the price, the system will automatically close the position, limiting your maximum loss.

2. Control the size of the position: Do not use too much funds to short a single currency, especially do not use too high leverage. Proper control of position size can reduce the risk of forced closing.

3. Pay attention to market trends: Pay close attention to the progress of projects related to your short-currency, market sentiment, macroeconomic environment, etc., these factors may affect the price trend.

4. Understand the cost of borrowing coins: Be clear about what borrowing fees you charge for and how to calculate them and include them in your trading plan.

5. Keep adequate margin: Even if you do not receive a margin call, if the market develops in an unfavorable direction, actively increasing margin can reduce the risk of forced closing and win you more time.

6. Choose mainstream and good liquidity currency: For novices, choosing mainstream currencies with large market capitalization and active trading to short can reduce liquidity risks and the probability of being "cleared at a fixed point" by extreme market conditions.

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