Cryptocurrency is one of the most volatile markets. The rate of Bitcoin or other coins can change several times a day: first to show growth, and then – a decline. Then again, the increase, and so on to infinity. As is known, the movement at any exchange takes place with the use of retail orders, which represent a market obligation, the volume of trading instruments bought or sold, for which no offset transactions were made.
To “keep” a stable profit, it is necessary to open, close, and change orders correctly. The essence of profitable trading is pure – buy cheaply, sell expensively, and earn money on it. For this purpose, the following types of commercial operations are carried out at the stock exchanges: short and long.
- Long vs Short Position in Investment Strategy
- Why Longing or Shorting Cryptocurrencies?
- How To Long Cryptocurrencies?
- How to Short Crypto?
- What Makes a Good Short Strategy?
- Shorting Bitcoin as a Part of a Trading Strategy
- How to Short Altcoins
- Bottom Line
Long vs Short Position in Investment Strategy
The majority believes that the word “Long” implies long-term opening positions and that the word “Short” is opening short-term deals. But this is entirely wrong. People use long strategy when they want to buy crypto money, so long is always about buying assets.
That is, in other words, long is a strategy in which the trader (or the trading bot) opens positions to buy a crypt, counting on the growth of its market value. This means that in the case of the BTC/LTC pair when we have Bitcoin, the trader or bot looks at when it is possible to enter the position itself. And as soon as it passes through, it goes into it and waits for the rate to go up, for the BTC to LTC to grow, and then it can be sold.
How Can You Short Cryptocurrency
How does shorting work? To open a short position means to borrow the cryptocurrency and sell it on the stock exchange at the current price. After the decrease in value, the trader buys the cryptocurrency at a lower price, repays the borrowed money, and makes a profit on the difference between the cost of buying and selling.
The loan is provided on the stock exchange by other market participants, who receive remuneration in the form of interest income. It depends on the term of the mortgage at a fixed rate. Many popular cryptographic platforms, such as Bitfinex, Kraken, and others, provide margin trading services – borrowing capital at relatively high-interest rates to increase their leverage. This results in the entire process of lending cryptocurrency for shortening being automated and configured by default.
What Is Longing?
The long position opens intending to withdraw profits when the rate moves upwards: purchases are made at a low cost, waiting for market growth, and sold at a rising price. The margin between buying and selling is the net profit of the stockbroker. When holding great deals, the trader has to risk a large volume of securities and take into account the amplitude of the market movement on long timeframes.
Why Longing or Shorting Cryptocurrencies?
If a trader is convinced that the price of a particular financial instrument will fall, he or she opens shorts. He borrows securities for sale from a broker. As soon as the asset’s exchange rate drops, it redeems them and repays the debt at a reduced value. The benefit of selling and buying is the trader’s income.
Have the securities reached the minimum price? It’s time to make long. Assets on the stock exchange are purchased at a low price. Then the trader waits for the growth of quotations and sells the securities, thus earning income from the difference between buying and selling.
How To Long Cryptocurrencies?
Taking a long line on cryptocurrency is the simplest investment strategy. In this scenario, you invest in the currency because its worth can increase over time.
It entails trading coins, which ensures that you own the money and that the income is calculated by the market value of your cryptocurrencies. This is the traditional low-buy and high-selling approach to technology innovation.
How to Short Crypto?
Shorting crypto requires traders to have the skills and readiness for analytics and prediction. Therefore, not everyone who plays a promotion can handle the falling market.
Professional traders know the psychology of newcomers to the industry, know when they will sell currency, and play shorts. Experienced players wait for such moments and start the process of “compression”. Compression allows you to get the maximum income from the created pressure on the market orders. To avoid losses, do not enter the market during the moments of the process of short positions, but instead make sales at the top of the rally.
Besides, it’s better to not start working at the exchange at the moment of opening short positions in the first and last hour of the trading session (it is better to focus on the time zone of the exchange headquarters or the audience for which the site is intended), which are full of false movements by market players. This is dangerous because other traders are only losing their positions in those moments.
A Brief Theory of Short Trading
When using “short” positions in trading, one simple rule should be remembered: even if the value of the cryptocurrency has fallen by half, you will not earn more than 50%, and if the price rises by a factor of two, the losses will be 100%. Thus, you need to be extremely cautious in such a “lowering game”, because the cryptocurrency market has surprised even experienced traders with the rapidity of changing trends.
Numerous people start briefly offering Bitcoin by using a margin trading stage committed to cryptocurrencies. This is the most straightforward kind of short trading when you borrow cash from a broker, make the exchange, trusting that your wager pays off.
There is a vast extent of different crypto margin trades out there, and it can be troublesome to know which are worth your time. Here is the list of the best trades in 2020:
- CEX IO
Contracts For Difference (CFDs)
What Is a Contract for Differences – CFD? A contract for differences (CFD) is a course of action made in financial subsidiaries exchanges, where the contrasts within the settlement between the open and closing exchange costs are cash-settled. There’s no conveyance of physical products or securities with CFDs. Contracts for differences is an advanced exchange procedure that’s utilized by experienced dealers and isn’t permitted within the United States.
In conventional money related markets, derivatives are utilized as hypothesis objects as well as protection against misfortunes. The last mentioned is known as support. One prevalent assortment of subsidiaries used for promotions is called futures. A future may be a contract between two parties in which one party concurs to pay the other a foreordained sum of cash for a primary resource at a particular point in time.
The Bitcoin futures’ contract is precisely what you’d anticipate supplanting money with Bitcoin. It could be a contract that empowers you to buy Bitcoin at a foreordained cost, at a particular point, within the future.
For illustration, on the off chance that today’s Bitcoin cost is 8,000 USD per BTC and you anticipate it rising to $10,000 per BTC in four weeks, at that point entering a contract which permits you to purchase Bitcoin at $9,000 in four weeks is exceedingly attractive. Thus, Bitcoin futures are an up and coming course within the developing crypto subordinates market.
Betting and Prediction Markets
Prediction Markets Business research is another way to consider bitcoin shortcuts. They have not been in the blockchain world for a long time, but they can be an advantage for currencies, including bitcoin. Such markets allow participants to create an event based on the results. So, you might forecast that Bitcoin will decline by a certain percentage of margin, and if anyone takes you up on the bet, you will be able to profit. Predictable is an indicator of a bitcoin prediction market. There are several popular prediction markets online today: Bet Moose, Weathbet, Fairlay, etc.
What Makes a Good Short Strategy?
Shorting Bitcoin is exchanging against a long-term uptrend; the longer the slant remains, the less secure this becomes. One thing to keep in mind – the highest benefit potential of a brief is constrained to a Bitcoin cost of 0, while buyers have no restraints on their profits.
Data provided by TradingView
If you look at Bitcoin cost charts, before long, you’ll realize the truth of the ancient exchanging truism, “price takes the stairs up but the lift down”. Though bullish moves take time to construct and create, bearish moves tend to be moderately brief and sharp.
Trying to brief the best of a huge bull run is intense; you’re likely to halt out numerous times as Bitcoin keeps rising like a persistent zombie. Keep in mind that on the off chance that innumerable dealers are additionally situated, a cost surge may result, as dreadful dealers compete to shut their shorts (i.e., they purchase back the Bitcoins they sold).
Analyzing the Advertise for Short Offer Opportunities
Beyond technical analysis, it makes a difference to know the Bitcoin space well. For reference, here are diverse sorts of occasions and how they’ve influenced Bitcoin’s price.
Past occasions that have activated major sell-offs:
- Failure of significant exchanges.
- Hostile administrative activity of significant nations (e.g. “China bans Bitcoin” fake news, SEC clamps down on ICOs).
- Well-known designers are stopping the Bitcoin advancement group (e.g. Mike Hearn, Gavin Andresen).
- Heightened hard fork dangers (eg. Bitcoin forking into Bitcoin Cash).
- Delays or difficulties in widely-desired overhauls (e.g. SegWit, Lightning Network)
Events anticipated to harm the price:
- Any disagreeable difficult fork.
- Breach of the cryptographic primitives utilized in Bitcoin.
- Discovery of Bitcoin code exploits, which debilitate wallet security or arrange operations.
- Hostile activities against Bitcoin by the governments.
- Movement within to begin with a million or so bitcoins mined by Satoshi Nakomoto.
Events which have had a small effect on cost include:
- The disappointment of darknet markets, eg. Silk Street or Alpha Bay.
- Claims of having deanonymized the character of Satoshi Nakamoto (e.g., Dorian Nakomoto or Craig Wright).
- Hostile proclamations from writers, financial analysts, lawmakers, financiers, etc.
Shorting Bitcoin as a Part of a Trading Strategy
Here are the top spread techniques of how to arrange shorting to be part of your trading strategy.
1. Tax Management
Taking short positions has the potential to diminish tax bills by making a difference in overseeing capital gains. Amid bull markets, finding capital misfortunes to adjust out capital pick up can be a challenge. Shorting can serve as a way of canceling out taxable pick up in such a showcase, which is especially valuable within the case of short-term capital gains (these are saddled at a better rate than long-term benefits).
Through long and short positions on diverse (but similar) securities, fund diversity, has been significantly reducing risk. For starters, various cryptocurrencies sometimes run about in parallel. Long on Bitcoin and short on Ethereum will theoretically secure one’s investments against specific market forces affecting the entire crypto-ecosystem.
3. Choosing any Direction
Shorting allows traders to continue trading, whether you believe that the market is up or down. If a trader becomes persuaded that rates should fall rather than rise, the trader will potentially increase his income by shorting Bitcoin (as opposed to a hold approach).
How to Short Altcoins
Do you want to make profits while the price of Altcoin drops? It’s probable. It’s likely. Necessarily, a short position on Altcoin implies that we believe in a decline in the Altcoin price. Technically speaking, short positions operate first by selling the base asset, Altcoin, in this situation, and then purchasing it back. You don’t have to worry; the markets immediately do this for us.
How to Short Ethereum?
Sometimes, ETH deals with other cryptocurrencies in currency pairs, not only with national currencies like dollars or euros. A dealer that thinks ETH falls in value compared with Bitcoin can only buy Bitcoin and swap it for ETH (BTC / ETH) after the value has dropped. While this is not exactly short, gains from a falling price in ETH can be allowed.
How to Short Litecoin?
If you already keep Litecoin, pass the sum of LTC to the exchange for CBP. Sell the amount (0.3% charge) or set a purchase cap and pay an exchange fee of 0% Place your purchase order for the same quantity at the lower price point.
Let’s answer the most common questions in terms of how to short crypto.
What are The Risks of Shorting Bitcoin (BTC)?
This really depends on the scale of your stake. We encourage you to consider using someone you trust to take the other side and write it up as a prop deal, even with small amounts (for example, $10).
How to Sell Short?
In short sales, the place will be provided by investing shares of equity or another commodity, which the lender expects to decrease in value by the defined expiry date. The lender instead markets these shares to investors who are prepared to pay the market price. The dealer hopes that the price will continue to fall before the lent securities are repaid, and they can purchase them at lower costs. There is technically no chance of losing in a short sale, as the price of any commodity will grow to infinity.
Why Could Short Selling BTC Be Bad?
There are at least two scenarios where shorting does not generate the expected profit:
- The price does not drop at all. This is the most unfortunate scenario, which indicates that the trader has poorly predicted the development of the situation and incorrectly defined the current trend of the cryptocurrency. The price has not fallen, but it has remained at ten bitcoins, which should be returned with interest.
- The price falls, but less than planned. For example, the bitcoin has fallen not to $6,500, but to $6,800 (which is also a very significant figure) and is not going to fall again. The rate is entering the upward trend again, and if the trader wants to make at least something on the shorting, he will have to pull the deal right now. With such a difference in rates, his dirty profit will be $2,000. Of that, almost $1,700 will be spent on commissions. His net income will be $300. And if the rate drops to $6,800, the commission will cut off the profits from the shorting. He’ll just go down, paying off the loan debt.
How to Short on Kraken?
Here is your entry for Kraken trading:
- Select sell order
- Select limit order
- Select 2x leverage (necessary to go short)
- Check current price
- Select the number of shares (3 for this example)
- Set sell price (this is to ensure the order is filled)
- Review your order
- Double-check it again
- Select Buy order
- Select Limit order
- Select 2x Leverage (on Kraken setting any leverage will exit a margin trade regardless of the value)
- Select the number of shares (3 again)
- Set Buy Price
- Review Your Order
- Double-check it again
How to Short on Poloniex?
On the exchange Poloniex, three separate accounts are created for each trader – exchange, margin, and lending. The exchange balance contains the funds that you use, for normal trading, in the Exchange section (tab). On the margin balance, there are funds intended for servicing borrowed money. The lending balance contains funds that you can lend to other players in order to get your profit from the turnover.
Is it Possible to Start Shorting Crypto on Binance?
The Binance Exchange provides this opportunity. Short is a tool used to open a deal to lower the rate. You can short manually or use a bot.
How it works:
- You sell coins
- We place a buy order
- We put up a safety order to sell. If they work, we update the buy order and place new safety orders if necessary
- After the buy, we cancel the safety orders
With 3commas, this is an easy way to trade without tracking the market 24/7.
How to Short on Bitfinex?
Fill your Trade bag with cash. This is used to back up the loan (and are removed in the event of a loss). It deals only with BTC / LTC.
When you believe it has been identified, enter a sale number and place your order on either the sector or place a restricted order at a fixed price. It initiates a “loan”, and you immediately borrow BTC/ LTC and join your position in the process.
How to Short on Bittrex?
At Bittrex exchange, a trader can borrow crypt currency from another user or from the exchange itself. The lender receives interest for borrowing its assets, and the borrower may use the funds at their own discretion. When shorting, the borrower buys crypt currency that will fall in crypto profit value.
How to short on BitMEX?
Bitmex, your last real crypto-shortening alternative, lives in a gray area. Theoretically, U.S. citizens can’t use Bitmex, but many people use the VPN anyway. Bitmex sells highly leveraged quick BTC contracts. You just choose the type of contract and power, finance it, and strike it.
How Do I Get Started?
It is not recommended for beginners to engage in shorting. As a last resort, they may try to short “calm” coins with a more predictable rate. The scheme of shortening for beginners looks like this:
- Choose the coin known in the market (newly baked cryptocurrencies will not work, because the trader will not have a base to study their market dynamics).
- Analyze how the value of the coin has changed, what factors have been associated with periods of deep correction, and the sharp decline in the price (i.e., to conduct a fundamental analysis of the cryptocurrency).
- Wait for the price to drop caused by the factors that worked before.
- Using margin trading, buy the cryptocurrency before its price goes down (for this purpose, you need to monitor market news of the crypt currency, watch the market and analyze the nature of price dynamics of the crypt currency).
- Sell coins after a sharp price jump.
But even better for beginners – to stuff your hand on short+long. With the right approach, this strategy also makes a profit, and also helps you to understand the functioning of the market and the formation of the price of the cryptocurrency. When this level is taken, you can move on to shorting.
The shorting game is considered to be a very effective strategy for making money on cryptocurrency. At the same time, it’s much riskier than investing in the long term or averaging.
According to experienced traders, under favorable conditions, the profit from shorting is 7-10% of the amount invested. At the same time, not all of the investments are made on its own, but mostly through borrowed funds. This significantly reduces the degree of the initial investment problem.
However, the amount of profit depends largely on the amount available to the trader. If a trader can borrow 10 BTC, he has a chance to earn several thousand dollars. If he has only 1 BTC at his disposal, he can’t count on serious profit.
Regardless, only experienced traders should shorten the bitcoin and work with large amounts. And then, if they are sure that they will be able to correctly analyze the market dynamics of the cryptocurrency and enter the market on the strongly pronounced downtrend. Only in this case, will the difference in rates allow earning 7-10% on the shorting.
If you want to minimize your risks and gain as much profit as possible, join 3commas, and use our auto trading bots and tools. We are happy to provide professional digital help with crypto trading, both for beginners and experienced trading experts. Our bot and tools for crypto traders help grow profits, minimize the risks involved with making money with cryptocurrency, and limit losses across multiple exchanges.