While many crypo enthusiasts are quite passionate about the future of blockchain protocols like Ethereum, it’s no surprise that not everyone shares the same outlooks.
Whether it’s concerns surrounding scaling, obscure use-cases or security vulnerabilities, there are some areas of Ethereum that are by no means plain sailing. Ethereum has a lot of room to grow but equally it has the potential for significant downturns. Aside from long-term fundamental issues that may lead someone to short the price of ETH, the extremely short-term volatility of Ether gives rise to countless opportunities to short the market.
A “short” in Ethereum and trading generally, describes the act of borrowing and selling ETH at today’s price with a promise to buy the asset back in the future. In this scenario, the trader is hoping that the price declines, allowing them to buy back at a lower price, paying back their loan and taking a profit. Shorting can be an extremely exciting and volatile practice but also carries with it a high degree of risk.
Shorting can also refer to any practice which involves placing a “bet” on the price of an asset declining. In this article, we’ll touch on several methods for shorting Ethereum, allowing the trader to profit from a decrease in the price of ETH.
4 Ways to Short Ether
There are a number of cryptocurrency exchanges that make it possible for traders to short Ethereum. The following guides make shorting ETH a simple and easy-to-follow process.
Kraken, a leading US-based exchange, offers up to 5x leverage on selected cryptocurrencies including Ethereum.
For margin trading, users must lock collateral in the account that acts as insurance to the exchange in the event that a short is liquidated – meaning the price of the asset increases beyond the liquidation price while a short position is open. Collateral used on Kraken can be in the form of either Fiat currency or cryptocurrency, with a full list of available collateral currencies here.
Please note that the liquidation price is dynamic to the amount of leverage being used. As a general rule, the higher the leverage being used, the smaller the window for being liquidated becomes. It is important that users provide enough collateral to account for significant price appreciation or risk having their position liquidated and closed.
In order to short Ether on Kraken, traders need to place a leveraged sell order on the relevant ETH market pair.
Taking the pair ETH/USD as an example, a leveraged position would execute the trade using Kraken’s ETH margin pool. In the case of leveraging a sell position, Kraken would lend ETH to your account from this pool, allowing you to sell it for USD and open a position. The trader can then realize the profit/losses only once the position is closed, buying back ETH/USD at – hopefully – a lower price.
- Simple leveraging interface
- Collateral based - losses cannot exceed deposits
- Highly trusted exchange
- Limited to 5x leverage
While there are many exchanges that allow for margin trading, it’s recommended to use an exchange with deep liquidity, ensuring positions can be opened and closed quickly and at a fair market price. Binance is one such exchange, with some of the highest verified trading volumes of any exchange.
As a leading global exchange, Binance also offers 5x leverage on cryptocurrencies including Ether. Please note that Binance has restricts Iran, North Korea, Syria, Cuba, Crimea, and USA from margin trading.
Binance differs from Kraken in that users must transfer funds into a separate “Margin Wallet” before they can trade on margin. This additional step creates a little more friction for shorting ETH than the smooth point-of-sale margin trading of Kraken. That said, the underlying mechanism to shorting a pair like ETH/USD on Binance is similar to that of Kraken. Traders must post collateral to trade on margin, however the only collateral type allowed is in the form of the exchange’s own token, BNB.
Using the ETH/USD market pair as an example again, the short position will remain active until either (a) the trader buys ETH/USD up to the amount of leverage used when the short was opened or (b) the position is liquidated due to movement in the opposite direction (in this case, an upwards direction).
One of the novel aspects of margin trading on Binance is that trading fees can be mitigated or reduced by holding and paying for transactions using BNB.
- High liquidity
- Trusted margin trading in Europe and Asia
- BNB token and "collateral wallet" create additional friction
- Unavailable to US residents
In the spirit of DeFi, here are some novel ways to short Ether in a non-custodial manner.
dYdX is a margin trading decentralized exchange with lending and borrowing capabilities. Similar to DeFi products like Compound Finance, users must deposit collateral to take advantage of the services being offered. All assets are held via smart contracts, meaning custody is never handed over to a third party.
Using dYdX, traders can take out a short position on ETH/DAI and ETH/USDC trading pairs. To do so, a user must first deposit USDC or DAI into their dYdX account to provide collateral for the trade. Deposits are made through a browser wallet like MetaMask and with a deposit made, a short position can be opened in just a few simple steps.
- Select “Margin” on the left hand side of the UI
- Select “Short”
- Enter the position size you wish to take out along with total leverage requested (up to 5x)
- Press “Place Market Order” to generate the MetaMask transaction required for the trade
During this process, the user will find a number of key details about the transaction displayed above the market order button.
These details include key factors including:
- Liquidation Price – the threshold price of ETH that will trigger liquidation
- Expected Price – the expected ETH price that the position will open in, taking into account slippage
- Interest APR – the annual interest rate applied to the amount borrowed (applied at every Ethereum block)
Users are also provided with an “Advanced” setting where a limit to the amount of slippage of a given trade can be set. This ensures that the trader is not adversely affected by poor liquidity in the order book.
- Decentralized with no 3rd party custodian
- No KYC required
- Limited liquidity and possible price slippage
- Smart contract risk
Synthetix is a derivatives exchange offering synthetic assets called “Synths”. Synthetic assets track the price of real-world assets, allowing users to speculate on the price movements of these assets with – in theory – unlimited liquidity. In the case of Synthetix, there are Synths for a huge range of assets including equities, commodities and of course, cryptocurrencies including Ether.
The platform offers two types of synths for both long and short positions. In the case of ETH, these are denoted as sETH (sythnetic ETH) and iETH (inverse ETH). The platform allows users to purchase these inverse Synths which amount to the same as shorting the underlying asset. In the context of Ether, purchasing iETH is the same as opening a short on dYdX.
To purchase iETH, visit synethetix.exchange and connect your web3 wallet. From here users can purchase sUSD or sETH (Synthetix representation of USD and ETH) either directly through the exchange or by using Uniswap.
Simply input the desired asset (sUSD or sETH) and the desired output (iETH) via the trading interface.
After selecting the transaction speed, a prompt will pop up in the user’s web3 wallet to confirm the transaction. Upon approval, iETH tokens can be viewed under the “Your Synths” section at the bottom left hand side of the page.
For more advanced users, it’s possible to mint sUSD by staking the Synthetix token (SNX) in the network. For every 1 SNX deposited, an amount of sUSD can be minted based on the network’s collateralization ration (currently 750%). This sUSD is then free to be traded for other Synths in the same way described above.
- Unlimited liquidity
- Decentralized and non-custodial
- Learning curve required, particularly for new users
Risks Associated With Shorting ETH
While long positions are simple to understand and user-friendly (buying and holding an asset is a simple concept to understand), shorting introduces ideas that initially seem counter-intuitive. In most cases, short positions require trading on margin, which in itself can provide additional layers of confusion – taking out a loan to buy and then sell an asset you do not own.
In addition to the learning curve, there are a number of potential risks that belie a short position.
Losing more than your deposit
While the exchanges listed on this page require some form of collateral, other exchanges allow users to open margin positions on credit. This type of borrowing is appealing for many as it can open up the possibility for as much as 100x leverage, however it is extraordinarily risky as traders are able to lose more than they deposit.
Unlike a traditional long position, where the maximum downside is reached when the price of an asset reaches zero, a short position has no limit to losses. The reason for this is that an asset can continue to appreciate indefinitely. Fortunately with the exchanges describe above, positions are backed by collateral and will be liquidated if the price of ETH moves too far upwards. This unlimited downside can still be costly, particularly if the trader continues to add collateral to their account in order to maintain a losing position.
It goes without saying that cryptocurrencies are enormously volatile. While ETH has significant liquidity and relatively low volatility compared to the broader ecosystem, its price can shift by +/- 10% in a matter of hours. This volatility makes short positions extremely difficult to maintain, as a sudden appreciation in price can result in an unexpected liquidation. This can be mitigated somewhat by providing significant sums of collateral, however this only serves to increase the possible downside.
To account for these risks, it’s important that a short trader actively manages their positions on a regular basis – particularly given the price volatility. Active management can be a risk in and of itself, as trading in a fast-paced, high-risk environment can lead to poor or emotionally-driven decision making. It’s essential that short traders are highly experienced and are aware of the risks and potential losses of opening an Ethereum margin trade.
Is now a good time to short ETH?
The Ethereum protocol is in its infancy yet it has already experienced significant growth. Founded in July 2015, Ethereum has grown its market capitalization from roughly $6 million to over $130 billion in a few short years. At most points in Ethereum’s history, a short position would have been cruelly punished.
While Ethereum continues to reach milestones, attracting new users and providing optimism for investors, the long-term outlook is certainly not plain sailing.
Unlike Bitcoin, Ethereum finds itself being upgraded on a regular basis. While these upgrades help to improve things like transaction throughput and privacy, they are also capable of introducing bugs to the system. With so many upgrades, it is possible that something catastrophic occurs, damaging investor confidence.
However, should Ethereum’s upgrades be implemented without issue, Ether will find itself with a potentially deflationary circulating supply as well as an increase in the amount of ETH used as collateral in decentralized finance. An increase in Ethereum’s popularity will also increase the number of transactions on the network, leading to a significant amount of ETH being burned in the process.
For these reasons and more, shorting Ether with a long time horizon can be considered very risky. While it is possible that software upgrades create issues, on balance, it seems more likely that these upgrades will add – rather than subtract – enormous value. Pending a catastrophe, Ethereum continues to serve as the leading smart-contracting protocol, with competitors stuck well behind the amount of progress being seen on Ethereum each day.
The volatility of ETH allows for an incredible number of shorting opportunities over very small time horizons.
In situations where the price of ETH has rallied dramatically in a short period of time, there typically follows a significant pull-back. This process of over-valuing cryptoassets has been fading over the years as liquidity has increased, however the market is still capable of mispricing assets like ETH on surprising regularity. Successfully finding moments where the price of Ethereum is due a significant correction can prove extremely lucrative, however with all the technical analysis in the world it is difficult to remain consistent at this.
The short-term outlook, then, is the same as it has ever been. Wildly volatile and totally unpredictable. However, this volatility in the upwards direction is often followed by a reversal, and capitalizing on that timing is one good reason to consider shorting Ether.
While the long-term outlook for ETH looks to be unkind to Ethereum shorters, the short-term outlook is one of enormous opportunity for traders with the experience and stomach capable of handling this volatile market.
A short is a position a trader takes by selling an asset with the intention of repurchasing it at a lower price. A trader opens a short position when they believe the price of that asset is likely to decrease.
Yes, ETH can be shorted with leverage using decentralized finance products like dYdx or through centralized exchanges like Binance and Kraken. The maximum leverage for shorting cryptoassets is typically limited to 5x, however there are other exchanges like Bitmex that will allow as much as 100x leverage.
Generally speaking, the higher the leverage, the more forms of identification are required for short positions to be opened. However, this is not the case in decentralized finance where KYC is not required to trade no matter how large the volume.
With an increasing amount of Ether being deposited in decentralized finance (DeFi), combined with a gradually diminishing issuance rate, scarcity for Ether is reaching all-time highs. As demand grows for Ethereum-based products (such as DeFi), it’s likely the price for will Ether will rise in parallel. This is elaborated on in our Ethereum investment case.