Any crypto trader should know how to profit when prices fall by shorting Bitcoin (BTC). You often hear about strategies, such as HODL and BTD, but in the world of cryptocurrencies, shorting is much less discussed. In this article, we will show you how to short bitcoins to profit from a bear market.
Shorting is essentially the practice of betting on the price of a falling asset. However, this is something more complicated than a bullish move. It’s easy to go bull: you just buy BTC and store it. Shorting, however, is a very different process. Keep reading to learn about fun stuff like leverage, short-selling BTC, the process of doing it, and which exchanges are the best to get satisfying results
- Bitcoin Trading Strategies: Long vs. Short
- Bitcoin Shorting Visualized
- Bitcoin (BTC) Longs: What’s That About?
- To Short or Not to Short: A 2020 Outlook
- 5 Ways to Short BTC
- When Should You Short-Sell BTC?
- How to Make Bitcoin Shorting a Part of Your Trading Strategy
- How to Short Bitcoin: Short-Selling Example Step-by-Step Guide
- Best Exchanges & Trading Platforms for BTC Shorting
- BTC Shorting Risks
Bitcoin Trading Strategies: Long vs. Short
Shorts and longs are essentially sell and buy strategies in trading. Most cryptocurrency assets are characterized by high volatility. The use of shorts and longs enables traders to profit from price fluctuations.
A long strategy is buying an asset in the expectation that it will rise in price. The amount of profit depends on the increase in the value of the investment.
A short strategy is the sale of a financial instrument in the expectation that it will fall in price. However, the mechanics of shorting are somewhat more complicated.
Under this scheme, a trader borrows an asset and sells it on the open market at its current price. Then they wait for the fall in the rate, buy the amount of the asset that they borrowed at a lower rate, and pay the debt with interest. The trader retains the profit received due to price changes. Otherwise, if the asset price rises, the investor will suffer a loss.
Bitcoin Shorting Visualized
Short-selling is a 3-way process: It’s important to note that the short seller will profit only if the price drops. If it goes up, the short seller will see a loss. You can enjoy a detailed read about how to short BTC (or other cryptocurrencies) by following this link.
Bitcoin (BTC) Longs: What’s That About?
For example, you buy a cryptocurrency, expecting that, after some time, its value will rise, and you will be able to sell it profitably. Let’s say you bought BTC for $500, and then sell it for $600, earning $100 for each coin if the cryptocurrency rate goes up. This is the most common and straightforward strategy for making money on cryptocurrency movements. To put it simply, long is a strategy in which you open positions to buy crypto, relying on the growth of its market value. Playing only by long is, in principle, a wrong approach. This deprives the investor of interest at the moment when the market falls, although it is possible and necessary to earn money in a falling market. Besides, trading only by a long strategy leads to natural losses in a falling market, when a person accustomed to playing long tries to play against the market. A trader must take advantage of all the market offers and play both up and down.
To Short or Not to Short: A 2020 Outlook
When there is a market uptrend, everything is clear: you buy BTC and wait for the right moment to grab your profit. You can, of course, enter the market tactically unsuccessfully and buy at the local maximum, but if the trend is strong, you will gain profit sooner or later.
But what to do when the market falls, and you’re in the win? Try the “bounce” method: buy crypto, hoping for a local minimum, and then quickly get rid of it, keeping in mind that any trend is generally to go downward. A hazardous activity, but sometimes an entirely successful one.
To not get yourself into this nightmare, it is better to play not against the trend, but according to the trend. This is what the short is for. It’s a bearish game when you see a downtrend, and you have money. Of course, you can make a mistake at the moment of entering the market and sell not at the maximum, but if you guessed right in the general trend, you would still gain profit.
There is a risk because of leverage, rather than shorting. And the more leverage, the greater the risk. If we talk about trading with first leverage using the shorting strategy, then this is almost the same as buying crypto with your own money in terms of risk. It’s just that in one case, you are bullish and buy a certain number of shares with your own money. In the other case, you expect the market to decline and, having a leverage of 1 to 1, borrow and sell the same number of shares as in the first case.
After all, the market can be in three states: uptrend, sideways drift, or downtrend. It is possible to buy crypto during an uptrend and a sideways trend, but a bullish trend on a downtrend will inevitably lead to losses. This means that if you only play bullish, then at least 30% of the market will pass you by. Shorting allows you to participate in the market for 100%.
5 Ways to Short BTC
For some perspective, BTC and other cryptos astronomically rose in value in 2018, and this didn’t stop investors from looking into going short even then. For investors who also want to take advantage of a falling market, shorting BTC and other digital currencies can pay off. Let’s take a look at how to go short on BTC:
When Should You Short-Sell BTC?
Deciding when to sell is more difficult for short cryptocurrencies, as their liquidity is not always high. The so-called squeeze is not excluded, in which you lose money instead of earning. In the long term, shorting BTC or altcoins is generally not recommended, as you can gradually drain your deposit.
Some marketplaces have lending that allows users to get coins to go short. Of course, the service is paid – on average, BTC is given at 0.2% per day. You can short cryptocurrencies on exchanges, such as Poloniex or Bitfinex. They have detailed manuals describing how the mechanism works.
The essence of working with a bear market is to use different opportunities for shorting. Each of the positions is used based on market behavior. The first option involves the selection of coins that are moving towards resistance. The second option consists of working with coins of minimum coiled spring or relative strength. If used correctly, both tactics allow you to find weak currencies, the rate of which should fall soon.
After a trader identifies the currencies that are falling in price, they must accurately determine the moment of shorting. This will affect the profit of the entire operation. You need to not just look at the chart online, but resort to technical analysis. With its help, the starting point of the shorting game is determined.
A signal that it is time to stop may be a triangle – the cryptocurrency chart movement along with a geometric figure or a double top’s appearance when the rate jumps several times in a short time. When the value of an asset decreases in the market, pay attention to short-term price indicators.
If the market is in a downtrend but does not match a downtrend’s characteristics, it is better to analyze short-term price indicators. Only a sharp drop in the price of an asset can bring the maximum profit, so the moment of opening and closing a transaction should be carefully selected.
How to Make Bitcoin Shorting a Part of Your Trading Strategy
There are two main ways of making shorting a part of your trading strategy.
The first one is a gradual build-up of a position on a decline to sell further when the trend changes. This method of sequentially buying at a lower and lower level is also called averaging.
For example, during the correction of Bitcoin prices in June of 2017 from the level of $2,900, it was possible to make several buy transactions at a specific interval (at the levels of $2,800, $2,600, $2,400, $2,200, $2,000), having received an average acquisition cost of $2,400. After that, already on the return of the price of $ 2,900, the income in percentage terms is more than 20%.
The second strategy, which is riskier, is based on the use of short positions. This name has nothing to do with the duration of transactions, but short positions are not held for months as a rule. When shorting, a trader borrows BTC and sells it on the market at the current price (for example, at $2,800).
After the price has decreased, the trader buys back the cryptocurrency at a lower price ($2,400), pays back the borrowed, and profits on the difference between the purchase and sale costs. In this example, the payoff would be approximately 14%.
When shorting BTC, one simple rule should be remembered: even if the value of the cryptocurrency has fallen by two times, you will earn no more than 50%, while if the price doubles, the losses will amount to 100%. Thus, extreme caution is required in such a bearish game, because the cryptocurrency market has more than once surprised even experienced traders with the swift change of trends.
Of the two strategies outlined above, the first is easier to apply and is suitable for most medium- and long-term investors. Nevertheless, many of them, observing another decline in the market, fear that if the price falls for too long and falls to the minimum level, it may happen that there is simply no one to sell the cryptocurrency.
No matter how long the period of the price decline (and only BTC history has more than ten long-term falls), the correction sooner or later ends, and the price reaches its next maximum.
How to Short Bitcoin: Short-Selling Example Step-by-Step Guide
We’ll show you how to short-sell your BTC on Binance. This is how your account equity can look like. You can first borrow, then go about your technical analysis, etc. Get on the margin exchange. Make sure you have the “M” selected because it shows all the pairs you can trade on margin: Now you’re going to sell your BTC in anticipation that its price will drop. If you go on the tab shown on the screenshot, the exchange will tell you your risks: When you borrow your BTC, you’ll see a pop-up you’ll need to confirm: This is how your account will look if you’ve successfully short-sold your BTC: This should give you a basic idea, but make sure to check out the tutorial on YouTube:
Best Exchanges & Trading Platforms for BTC Shorting
On most exchanges that provide margin trading services, the process of borrowing cryptocurrency for sale, in short, is automated. BTC is lent by other investors, receiving a fee in the form of interest income depending on the loan term’s length. The rates vary but rarely drop below 2% per month. The possibility of BTC shorting is available on such popular exchanges as Binance, Bitfinance, Kraken, and Coinbase.
BTC Shorting Risks
Going short involves a lot of risks. Of course, the price of a coin may suddenly rise after an investor has just sold the coins in the hope of being able to repurchase them later at a lower price. At that time, the investor should have gone long because now he is making a loss by buying back the coins at a higher price. Of course, the same goes for going long while prices are falling.
Let’s say you shorted 100 USD worth of BTC back when prices were only 10 USD per coin. That means you short-sold ten coins. Let’s assume that you have yet to repurchase the coins, meaning that you still have to pay the owner back with ten BTC. Now imagine that all of a sudden, the price went up to 4000 USD. The ten BTC you need to pay back now turned into 40,000 USD!
When short-selling, you must have sufficient trading capital to keep your current position open. You make a profit as soon as the price has dropped to the price you set in advance. Until then, the price of your crypto can fluctuate.
When the price goes the opposite direction of your target, if the price goes up, your goal is for the price to fall: your position is red. Your status will turn green as soon as the price is at the height that you have set in advance. It is also possible not to set a target, but only a direction.
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