Welcome to this guide, where we are going to look at how you can go short and make money when the price of cryptocurrencies falls on KuCoin.
KuCoin, like many other cryptocurrency platforms, allows us to short or sell certain cryptocurrencies to make a profit if they fall in value. Although for this, it is different from the classic buying and selling in the spot market. So let’s see how to do it.
To do this, we will use the futures of this platform, as it is the best financial product to be able to go short (sell) and make money on market falls. There are other ways such as leveraged tokens but they do not work as well as futures.
If you have never used futures before, you can find a detailed guide on how they work here. And with that said, let’s get started.
To do this, go to the top menu under derivatives and futures classic. From the app, you will see in the main menu the futures option.
Here, it will take us to the futures panel. At the top left, select and search for the cryptocurrency you want to short (sell). Click on the drop down arrow and search for the token you want to short.
Please note that not all cryptocurrencies found in kucoin are in futures as well. However, a large majority of them are. So if it is a new token or with low market capitalisation, it is possible that it is not available in futures.
With the pair selected, we will go to the right side of the panel. Here we can indicate different options, but if you want to make the operation at the current price of the cryptocurrency, click on last in Price. This way, you will place the last market price so that the order will be executed instantly. So click on last and the price of the cryptocurrency will be displayed.
In amount you indicate the amount you want to use in that trade. And under leverage, it is the leverage. If you want to reduce the risk of being liquidated, you can use x1 leverage, which would be like using nothing. In this case, the price of the cryptocurrency would have to rise twice as much to be liquidated if you go short, whereas if you use for example a x2, with a 50% rise, your position will be liquidated. In a market as volatile as cryptocurrencies, my recommendation is to use little or no leverage if you have no experience or knowledge with it.
With the leverage indicated, we can indicate a take profit and stop loss if we want by clicking on the TP/SL of Short box and indicating the amounts where to take profit and sell the position to mitigate the loss.
All that remains is to review the trade and click on sell/short. And so, we will have our trade open short, where we will make money when the price of the cryptocurrency falls.
You can close the position at any time by going to your futures orders and selling your position. Now that you know how to open a short position, let’s answer the main questions. Going short or selling can be confusing, especially for users who have never used this type of financial instrument before.
How it Works to Go Short (Sell) on KuCoin
When you go short, you are not actually selling the cryptocurrency, as you do not own it. What you are doing is borrowing an amount of that cryptocurrency with the obligation to buy it when you close the position. So you are borrowing, for example ETH to sell now, but with the obligation to buy it when you close your trade.
This makes it different from buying or going long. The main difference being the potential gains it has, which can often cause a lot of confusion. But first, let’s talk about the risks, before the gains.
The risks of going short are very similar to buying futures. Depending on the leverage, your position can be liquidated earlier if you do not add more capital to the trade. If you do not use leverage, which would be with leverage x1, when the price doubles your position will be liquidated. Let’s look at an example. If you open a short ETH position at a price of $1,000 with 1 ETH, with x1 leverage, and its price shoots up to $2,000, your position will be liquidated. Since you have now sold that 1 ETH with the obligation to buy it back in the future when you close the operation. But the value being double, with the capital that you have indicated in the operation you will not be able to buy 1 ETH. Since it is now worth twice as much. And to avoid liquidity problems, your position will be liquidated.
Another very common doubt and confusion is the amount you can earn by going short. Many people have the confusion of thinking that if the price of, for example, Ethereum goes from $1,000 to $200, they will be earning 5 times the capital of the operation. And this happens, because if you do the same operation but in reverse, buying at $200 and the price of ETH rises to $1,000, you will earn 5 times your capital.
But going short (selling) works differently. There is a maximum you can earn on each trade, unlike going long (buy). And this maximum is 100% of the capital you have placed. So, if in a short trade you place $1,000 with x1 leverage, the maximum you can earn is $1,000 more. Unlike when you buy, you can earn much more than the capital you invest. And this is because of the following.
When you buy (go long) you can sell the cryptocurrency or trade at much higher prices. On the other hand, when you go short (sell), as you are actually selling the cryptocurrency when you make the trade, with the obligation to then buy it back, the only thing you can earn is that when you close the trade and have to buy the cryptocurrency back, its value is much lower. This means that the maximum you can earn is 100%. If this is still not clear to you, let’s take a look at an example.
We go short (sell) ETH with $1,000 at an ETH value of $1,000 at the time of the trade. The price of ETH drops to $50, so we decide to close the short (sell) trade and take the profit. When we close the trade, we will have to buy back ETH at the current price, which is $50. And this leaves us with $1,950 in total, with a profit of $950, which is the $1,000-$50=$950.
On the other hand, if it were the other way around and you bought $1,000 of ETH at a price of $50, and then sold it at a price of $1,000 ETH, you would make a profit of $20,000. This is the main difference between going short and going long in terms of potential profits.
In order to earn more by going short, the only thing you can use is leverage to use more capital in the trade, but with a higher risk of being liquidated and losing your capital.
I hope this has helped you to understand how you can go short KuCoin and make money on market crashes. Remember, if you don’t have a binance account, you can create one just below.