Can You Still Short Crypto in the US?

Individuals in the United States seeking to speculate on a decline in cryptocurrency prices may consider various methods of short selling. This financial strategy involves profiting from an asset’s decrease in value. While the process can be intricate due to the unique characteristics of digital assets and the evolving regulatory landscape, short selling cryptocurrencies is indeed possible for US persons through specific financial instruments and regulated platforms.

Fundamental Concepts of Short Selling

The core mechanism involves borrowing an asset, selling it at the current market price, and then repurchasing it later at a lower price to return to the lender. The profit is the difference between the initial sale price and the repurchase price, minus any associated fees or borrowing costs. This process allows market participants to take a bearish stance on an asset.

To execute a short sale, traders use a margin account, which allows them to borrow funds or assets from a broker. Margin refers to the collateral, or the initial capital, that must be deposited with the broker to cover potential losses. This collateral acts as a security deposit, ensuring the trader can meet their obligations.

A margin call occurs when the value of the assets in the margin account falls below a predetermined maintenance margin level. The broker requires the trader to deposit additional funds or assets to bring the account back to the required margin level. Failure to meet a margin call can lead to liquidation, where the broker forcibly closes the short position.

Funding rates are periodic payments exchanged between long and short traders in crypto derivatives, such as perpetual swaps, to keep the contract price close to the underlying asset’s spot price. When funding rates are positive, long position holders pay short position holders, and when negative, short position holders pay long position holders. These rates can impact the profitability of a short position, especially over longer holding periods.

Methods for Shorting Crypto in the US

Several distinct financial instruments and strategies allow individuals in the US to establish a short position in cryptocurrencies. Each method leverages different market mechanisms to enable a profit from price depreciation. Understanding these options is essential for navigating the crypto shorting landscape.

Perpetual swaps are derivative contracts that allow traders to speculate on the future price of a cryptocurrency without an expiry date. Unlike traditional futures, perpetual swaps do not have a fixed settlement date, making them popular for continuous trading. The funding rate mechanism helps to anchor the swap price to the underlying cryptocurrency.

Futures contracts are agreements to buy or sell a cryptocurrency at a predetermined price on a specific future date. When shorting with futures, a trader sells a futures contract, anticipating that the price of the underlying asset will decline before the contract’s expiry. The trader profits if the price has fallen.

Options contracts provide the right, but not the obligation, to buy or sell an asset at a specific price by a certain date. To short a cryptocurrency using options, a trader might purchase a put option, which grants the right to sell an asset at a specified strike price. Alternatively, selling a call option, which grants the buyer the right to purchase the asset, can also create a bearish position.

Margin trading on spot exchanges involves borrowing a specific cryptocurrency from the exchange or other users and selling it. The trader then waits for the price of that cryptocurrency to drop, repurchasing the same amount at the lower price and returns it to the lender, profiting from the price difference. This method requires collateral and is subject to margin calls and potential liquidation.

Regulated investment products, such as inverse exchange-traded funds (ETFs) or exchange-traded products (ETPs), provide indirect short exposure to cryptocurrencies. These products are designed to move in the opposite direction of the underlying cryptocurrency’s price. Their availability to US retail investors is dependent on regulatory approvals and varies.

Regulatory Environment in the US

The regulatory landscape for cryptocurrency activities, including short selling, is complex and continues to evolve. Different federal agencies assert jurisdiction over various aspects of the digital asset market, depending on how a particular cryptocurrency or financial product is classified. This classification significantly impacts which rules apply and what activities are permissible for US persons.

The Securities and Exchange Commission (SEC) oversees securities markets. The SEC’s stance is that many cryptocurrencies may qualify as securities. If a crypto asset is deemed a security, then offerings and trading activities involving that asset, including short selling, fall under federal securities laws.

The Commodity Futures Trading Commission (CFTC) regulates derivatives markets. The CFTC has classified certain cryptocurrencies, such as Bitcoin and Ethereum, as commodities. Derivative products built upon these cryptocurrencies, like futures contracts and perpetual swaps, fall under the CFTC’s jurisdiction. Platforms offering such products to US persons must comply with CFTC regulations.

The Financial Crimes Enforcement Network (FinCEN) requires businesses that transmit money, including many cryptocurrency exchanges, to register as Money Services Businesses (MSBs) and comply with anti-money laundering (AML) and know-your-customer (KYC) regulations. These regulations mandate identity verification and transaction monitoring, impacting all crypto-related activities.

Many non-US platforms are not accessible to “US Persons” due to regulatory restrictions. Regulatory bodies ensure US residents engage with financial products and services that comply with domestic standards. Platforms often implement geo-blocking or strict KYC procedures to prevent access by US persons to non-compliant offerings.

Accessing Shorting Opportunities on US Platforms

For US individuals looking to short cryptocurrencies, selecting appropriate platforms, completing necessary verification, and understanding the process of funding and trade execution are key. The availability of specific shorting instruments depends on the platform’s regulatory compliance. Choosing a US-compliant platform is essential.

Platforms licensed and regulated within the United States offer a more limited range of products compared to international counterparts. These include centralized exchanges with relevant state and federal licenses, or regulated brokers that offer crypto-linked products such as futures or options. It is important to confirm a platform’s regulatory status before proceeding.

Account creation and verification are standard requirements on US-compliant platforms. Users must complete Know Your Customer (KYC) and Anti-Money Laundering (AML) procedures. These measures comply with FinCEN regulations.

Funding an account on a US-regulated platform involves traditional financial methods. Bank transfers, such as ACH or wire transfers, are available options. Some platforms may also support debit card deposits. The specific funding options can vary by platform and may have associated fees or processing times.

Executing a short trade on these platforms involves navigating to the specific market or instrument. After funding an account, users select the desired cryptocurrency, choose the appropriate order type, and specify the amount to short. The platform’s interface guides the user through placing the order.

After a short position is opened, monitor its performance and margin requirements. Platforms provide tools to track open positions. To close a short position, the trader executes an opposite trade, realizing any gains or losses.