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I want to short a cryptocurrency that is highly overvalued. Let say its current value as of now is $10,000 , my intuition say that sometime next year like Feb its going to fall significantly to about $1 (I know that seems crazy) but it can happen.

That's a -99.99% drop in price. Hence increasing my shorting investment by x0.9999 roughly doubling my money.

But if it was a long position from $1 to $10,000 it would be a 999900% increase hence increasing your investement by x9999

Doesn't seem fair right?

But imagine this shorting scenario:

The price moves from $10,000 to $100 , I make 99% in profit. Basically the * same profit as the shorting from $10,000 to $1.

But now I close my position at $100 hence I double my money(let say my inital shorting investment was $1000) so I now have * $2000

I open a short position using $2000 at $100 then the price goes to $1 dollars. That gives me essentially another double up to $4000 That's x3 in profits.

I know the last short has a greater risk of being margin called. But I just used to illustrate that in a way you can bypass the 100% limit . Is there a better way to do this.

I know you can have multipliers(Margin Leverage) but is there a better way?

EDIT: Keith's Explanation is great , I think I understand better the mechanics of shorting, but as explained you would still need alot of margin in your account.

AFAIK there's no broker/exchange that would let you borrow/short a crypto without having some form of security(Most of the time 1:1 collateral) backing it ,leading to the* 100% limit without multipliers.

I think @CQM answer best suits this question, although I may have not explicitly stated it, my main goal is to fully capitalize on a price crash.

  • What do you mean by "a better way"? You're not really "bypassing the 100%" limit here, you're just reinvesting the gains in another transaction. Suppose I have a game where you pay me some money and we flip a coin and if it's heads I pay you back double (otherwise I keep your money). The maximum profit you can earn from this game is 100%. But if you win you can wager all your earnings and thus quadruple your money. This isn't bypassing the 100% limit, it's just playing the game again. – BrenBarn Dec 26 '17 at 6:43
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    "Doesn't seem fair right?" This is math, not Gender Studies. It is what it is. – RonJohn Dec 26 '17 at 6:44
  • In short no pun intended there's isn't a better way to Capitalise on a price crash. – Bob Kimani Dec 26 '17 at 16:17
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If you use put options you can exponentially amplify your gains.

Ignore the mental gymnastics of the other answers. Buying Put options are a bearish bet that will amplify your gains.

In fact the CBOE offers a product called DOOM puts for this specific scenario (finance and money is only as serious as you want it to be). These stand for Deep Out Of the Money puts and are intended to compete with the returns of Credit Default Swaps if you think something is DOOMed.

You can make thousands of percent gains on the downside now, instead of merely 100%

  • I know this might be out of scope, but how does one trade on CBOE, I haven't found their trading website. – Bob Kimani Dec 27 '17 at 12:31
  • CBOE merely creates financial products and lists them on exchanges like Nasdaq. They dont offer cryptocurrency options, although LedgerX does for extremely high net worth people – CQM Dec 27 '17 at 18:40
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I don't think you're reasoning through this correctly.

When you short something (a stock, cryptocurrency, bond, etc) you're essentially borrowing those shares, selling them at the current price, and agreeing to pay the shares/coins back later at the future price.

If you borrow 1 coin at $10,000 and sell it short; then close out your position after it falls to $1. You're netting out a $9999 profit per share/coin.

That is the EXACT SAME PROFIT you would net if someone bought the coin at $1 and it went to $10,000: $9,999

Now you could say that the % gain is not the same because you'd need more margin to short more shares at $10,000 BUT the fact is the coin is CURRENTLY TRADING AT $10,000.

So, a better way to think about it would be: you'd make the same percentage profit selling at $10,000 and watching it go down to $1 as you would buying it at $10,000 and watching it go to $20,000. Because both of those calculations involve a correct assessment of the amount of capital (or margin) that you need to invest in a number of shares at the CURRENT price.

  • In your two scenarios, the profit is the same but the percent is not the same. ROI is based on the margin requirement and it's vastly different for buying for $1 versus shorting at $10,000 – Bob Baerker Sep 18 '18 at 3:35
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Keith's answer is good, but let me explain another way you are thinking about this wrong.

Your percentage profit is the amount of money you make divided by the amount you invest. When you do a regular transaction - buying at $10,000 and selling at $1 - you have invested $10,000 and lose $9,999, for a -99.99% profit.

But in the short sell case you do not invest $10,000. You pay some fees for the borrow and sale, but not the $10,000 that they cost. Your profit is $9,999 divided by your investment costs.

  • You ignored the margin required to support the short sale. – Bob Baerker Sep 18 '18 at 3:36

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