This article will explore the perplexing question, “Why can’t I short crypto on eToro UK?” Shorting cryptocurrencies, a common trading strategy in conventional markets, allows investors to profit from price declines.
Nevertheless, such an option may not be readily available on eToro UK due to legal restrictions or certain policy constraints associated with the platform. We will consider why such restrictions exist and suggest other trading methods in eToro UK’s crypto market.
What Is Shorting Crypto?
Shorting crypto is also termed short selling. It is a trading strategy in which an investor borrows a digital currency and sells it in the market, hoping its price will go down. Consequently, the investor repurchases the same amount of asset at a lower rate, gives it back to the borrower, and makes money from the price deviation. Investors can use this technique to gain from deteriorating rates in the cryptocurrency sector.
How Shorting Works In Traditional Markets
Short selling functions similarly to shorting cryptocurrencies in conventional markets. The investor borrows stock shares from the broker and sells them at the market, hoping for a decline in prices. After that, the investor purchases these shares at a lower price, returns them to the broker, and profits from the difference.
This allows investors to make money when prices fall within traditional financial markets, enabling speculation and risk management opportunities. Short sales are regulated and typically require margin deposits/requirements to control possible losses.
Brief Explanation of Shorting In The Cryptocurrency Market
Like traditional shorting, cryptocurrency shorting involves borrowing digital assets such as Bitcoin or Ethereum and selling them on exchanges. The intention is to purchase it back at a lower price and return it to the lender while keeping the profit. Nevertheless, it has high volatility and relatively unregulated platforms.
Therefore, shorting in the crypto market is riskier since it operates around the clock. Moreover, other exchanges may have limited short-selling capacities or need particular account conditions. However, despite adversities, this strategy offers the potential for earning profits during both bull and bear markets.
How Does Short Selling on eToro Work?
Opening a Short Position: To short-sell any cryptocurrency in eToro, trade” rs w”would open a “Sell” position for the particular cryptocurrency pair they want. This suggests that they are speculating that the future price of cryptocurrency will be lower.
Margin Requirement: Normally, users have to make some deposit as a margin when opening a short position through CFD trading. This margin acts as collateral to cover potential losses.
Monitoring the Position: After opening a short position, one can track the currency’s price movements. If prices fall as predicted, the trader will gain some benefits from it, but should they rise, this also means that such a trader needs to incur costs.
Closing the Position: The sellers can close their short positions “y p” by placing a “Buy” order for the same crypto pair anytime. The profit or loss of any trader is determined by subtracting closing fees plus overnight financing charges from (the difference between) opening and closing prices.
Limitations of Shorting Crypto on eToro UK
There are many limitations to shorting crypto on eToro UK. These include.
Regulation Boundaries: The Financial Conduct Authority (FCA) is the regulatory body ensuring that eToro UK operations comply with the existing rules and regulations. For instance, due to concerns or limitations imposed by a regulatory body like FCA, eToro cannot provide a way for users to speculate on cryptocurrency prices.
Rules on Trading Platforms: On their platform, there may be some restrictions or prohibitions against short-selling cryptocurrencies. Policies might hinge upon risk management techniques, customer protection schemes, or other applicable strategies for such platforms.
Market Forces: Cryptocurrency markets tend to be speculative and volatile, thereby causing challenges in relation to strategies for shorting. This could lead to decisions not to provide this option due to pricing dynamics and various hazards associated with cryptos’ unpredictability.
Adherence Requirements: Some trading features, such as short selling, may not be available because EToro UK must comply with anti-money laundering (AML) and know-your-customer (KYC) protocols.
Alternative Strategies For Trading Crypto on eToro UK
For eToro UK traders who cannot short positions on crypto, several alternative strategies can be considered:
Long-Only Trading: Instead of betting on falling prices, investors can seek long-term growth by purchasing and holding cryptocurrencies they think will rise in value with time—this aligns with the UK’s advocacy for buying and holding cryptocurrency as an investment.
Leveraged Trading: By enabling leverage trading options, eToro UK helps individuals expand their position sizes using borrowed funds. Although more risky, this may result in higher returns if the market moves in favor of the trader. However, it is essential to note that this involves risks associated with leverage.
CEToro’sding: EToro’s CopyTrader allows users to follow suit by copying trades of successful investors. Users will not have to shortlist crypto directly when they identify and imitate experienced traders who strategically maneuver through the cryptocurrency market for their investment objectives.
Hedging: On other platforms that support shorting, such as derivatives like options or futures contracts, traders can also use these to hedge their cryptocurrency portfolios. Hence, the potential loss of eToro UK’s portfolio could be offset by profit from other platforms where short positions have been opened.
Diversification: Spreading across various asset classes, including stocks, commodities, fiat currencies, and cryptocurrencies, will go a long way in eliminating risks while supporting a portfolio’s overall performance. They have access to different assets offered by eToro UK, which allows them to diversify their investments accordingly.
What are The Fees for Short Selling on eToro?
Spreads: eToro generates revenue from the spread, which is the difference between an asset’s buy and sell prices. When opening a short position, traders typically sell at the bid price slightly lower than the asking price. The spread represents the cost of executing the eToro and serves as the eToro’s primary source of income.
Overnight Financing Fees: Traders may incur overnight financing fees when holding a short position overnight. These fees are applied to leveraged positions and are calculated based on the position’s size asset’s underlying asset’s prevailing interest rates. Depending on the direction of the trade and the prevailing interest rates, they can be debited or transferred to the trader’s account.
While eToro doesn’t charge specific fees for short selling, traders should be aware of potential incidental charges, such as withdrawal fees, inactivity fees, or currency conversion fees, depending on their trading activities and account settings.
In The End
There isn’t another online trading system in the UK that offers crypto shorting. This limitation can be attributed to several factors, most notably regulatory constraints.
eToro UK operates within the tight frameworks set by the Financial Conduct Authority (FCA), which might impose certain restrictions on shorting cryptocurrencies because of market stability and investor protection concerns.
Further, specific platform policies at eToro may disallow other financial instruments, such as selling shorts on cryptos, based on their user-centric strategy or risk management procedures.
Moreover, the dangers inherent in the volatile and unpredictable nature of cryptocurrency markets make shorting strategies very difficult to adopt, thereby preventing eToro from including such a feature in its site decision-making process.
However, a trader can participate in the cryptocurrency market without these limitations through alternative trading strategies on eToro UK’s platform.
This is a relatively better option for investors. However, there is also a third way of investing in bitcoins, i.e., buying bitcoin mining stocks or investing in companies that mine bitcoins under client contracts (Hoste 2019).