How To Short Ether

Reviewed by Julius MansaReviewed by Julius Mansa

Short Selling Ethereum

Short selling Ethereum (ETH) involves borrowing ether and immediately selling it, with the plan to buy it back when prices drop. This strategy is used by traders with a bearish outlook on the market to take advantage of declining prices.

A successful short provides a profit of the difference between the sale and repurchase price, less any fees. But it’s a strategy that offers the potential for unlimited losses. ETH is a notoriously volatile asset, and losses can mount quickly. To cite an example, on May 21, 2024, the price of ETH spiked 22% in 24 hours on news of a potential ETH exchange-traded fund (ETF), causing over $280 million in losses marketwide on short selling.

Below, we take you through several ways to short the cryptocurrency.

Key Takeways

• Short selling ether is borrowing ETH, selling it, and repurchasing it after prices drop.
• Short selling ether generally requires a margin account on a cryptocurrency exchange.
• Shorting ETH allows traders to potentially profit when the price falls. This can be a way to hedge other crypto holdings or capitalize on bearish market sentiment.
• While it offers the potential for high rewards, shorting ETH carries the risk of unlimited losses.
• Traders can use alternative strategies instead of short selling ether, such as buying short ether ETFs.

How Shorting Ethereum Works

Short selling refers to when an investor borrows an asset—in this case, ETH—and sells it on the open market, planning to repurchase it later for less. The exchanges that allow you to short ETH often require you to hold a margin account. These accounts allow you to borrow money to buy assets, in this case ETH. What’s borrowed, called “margin,” is often used to augment your buying power and potentially amplify your gains.

Suppose you think ETH is due to drop in price soon, and you have $10,000 in your margin account, which allows you to trade up to twice what you have in the account. The price of ETH on crypto exchanges is about $4,000. Here are the steps:

1. Borrow on margin: You decide to use the maximum leverage allowed and borrow an additional $10,000 from your broker, giving you $20,000 to trade.
2. Shorting ETH: You use the entire $20,000 to short sell five ETH. This means you’re selling five ETH you’ve borrowed from the broker, expecting to buy them back later at a lower price.
3. Price drop: As you predicted, the price of ETH plummets to $3,000.
4. Close the position: You buy back five ETH at the new, lower price of $3,000, spending a total of $15,000.
5. Profit time: You return the five borrowed ETH to the broker and walk away with a $5,000 profit (minus any fees or interest).

Using ETH Futures ETFs

Ether futures ETFs began trading in October 2023. If you have a margin account that allows short selling, you can sell short one or more of these Ether ETFs to profit from falling ETH prices.

If you don’t have the desire to sell ETH futures ETF shares short, another option is to purchase a short cryptocurrency ETF, like the Proshares Short Ether Strategy ETF (SETH). This ETF attempts to return the inverse of the Bloomberg Galaxy Ethereum Index.

Prediction markets like Kalshi are another way to wager on ETH prices going down.

Margin Trading

One of the most accessible ways to short Ethereum (ETH) is through a cryptocurrency margin trading platform. Many exchanges, including brokers that trade shares of inverse ETH ETFs, facilitate this type of trading, allowing traders to borrow funds to boost their position. This leverage can significantly boost potential gains. The caveat is that potential losses are magnified as well.

It’s crucial to remember that margin trading, like any leveraged trading strategy, requires careful risk management and a thorough understanding of the market. Always research any exchange or brokerage you plan to use, and never invest more than you can afford to lose.

Why Would You Want to Short ETH?

A short position profits from falling prices. If you believe that ether is overpriced or may go down, you might go short to capitalize on that. If the price of ETH rises, you will instead record losses.

Why Is the Potential Downside of Short Selling ETH Unlimited?

Shorting a cryptocurrency like ETH involves betting on its price to fall. However, unlike buying long, where your losses are capped at your initial investment, the risk of shorting is unlimited. This is because there’s theoretically no limit to how high the price can climb, and you’ll eventually have to buy back the borrowed ETH to return it, regardless of how high the price has gone.

What Is an ETH Futures ETF?

An ETH futures ETF is a fund that allows investors to gain exposure to ether through futures contracts rather than by owning and having to store the cryptocurrency directly. These ETFs track the price of ETH futures, which are contracts that obligate the buyer to purchase or the seller to sell ether at a predetermined future date and price. A spot ETH ETF would hold the digital currency directly, though they have yet to be approved by the U.S. Securities and Exchange Commission.

What Does a 2x Ether ETF Do?

An ether 2x ETF is a fund that seeks to provide twice the returns of ether’s market price or an ether-related index or product. If the market goes the wrong way, though, you can end up with twice the losses over simply trading ether itself.

The Bottom Line

Shorting ether is a strategy of borrowing, selling, and repurchasing the cryptocurrency when the price drops. There are several ways to short ether. First, one can use one of the crypto exchanges that allow shorting ETH. You can also borrow shares of an ETH futures ETF to wager against its price going up. There are also inverse ETH ETFs that use margin trading strategies to return the opposite of ETH’s price moves in the market.

Short selling any asset is risky, but short selling a volatile one like ETH amplifies those risks further. Only those who know the market well and can afford to lose the value of their trades should consider engaging in this strategy. There could be upside, but the downside of short selling ETH is unlimited.

Read the original article on Investopedia.