You might be wrong if you think that you can only make money in crypto when the market goes up. This means you are unaware of the concept of shorting. Shorting allows you to make money when the market goes down. So if you believe that Bitcoin or any other crypto will crash in the coming days, taking a shorting position might be a great idea. But is it that simple? The concept behind shorting is to buy Bitcoin or any other crypto at a high price and then buy it back at a lower price.
Usually, most traders prefer buying crypto at a lower price and selling it at a higher price. But when it comes to short, you just need to do the opposite. To get into a short position, you will need to borrow cryptocurrencies and sell them on an exchange at the current price.
Then you will need to buy the cryptocurrency at a later date and repay the capital you have borrowed. In short, shorting means doing the opposite of going long. On the other hand, you should go long when you know the market price will go up.
But you should know that shorting comes with risks. Now there are different ways of shorting Bitcoin or different types of short trading concepts. Some of the known ones are the following:. Margin trading is said to be the easiest option.
In this trading type, you are borrowing crypto from a broker in order to execute a trade. Also, you should know that margin involves borrowing or leveraging money. This means it cannot only increase your profits but lead you to greater loss. Usually, the broker offers you a certain percentage of the money you can borrow from the exchange and use it for your trading. Also, after a given number of days, you will need to return the money you have borrowed and settle down the transaction.
Like any other asset, Bitcoin, too, has a future market. In a futures trade, you are buying security with a contract. The contract specifies when and at what price the security will be sold. If you buy a futures contract, you are betting that the price of the security will go up. So you can get a good ROI. Thereafter, you must purchase contracts that bet on a lower cryptocurrency price. In short, when you are shorting futures, you agree to sell a contract at a lower price.
Plus, the good part about it is that new traders can get into it with modest investment. CFD stands for contract for differences. It is a financial strategy that pays out money based on the price difference between open and closing prices for settlement.
It is a similar concept to Bitcoin futures. As they are betting on the cryptocurrencies price. So when you purchase a CFD, you are betting that the price of Bitcoin will fall. Hence, you are shorting Bitcoin. Plus, the good part of CFDs is that they have a flexible settlement tenure, unlike the Bitcoin futures. There are also binary options for shorting Bitcoin. The call and put options are a well-known concept where you have to execute a put order using an escrow or other services.
There are many offshore exchanges that offer you binary options. But it involves high cost and risk. The put option gives you the right to sell Bitcoin at a certain price and on a specific future, date called the expiry date. Put options are typically traded within a time range, e. Unlike futures, you can decide whether or not you want to exercise the right to purchase or sell the asset on the said date.
If you choose to exercise that right because your prediction was correct, then you have to pay what is called a premium. To short Bitcoin via a put option, you need to buy a contract with a strike price that is less than the BTC market price at the time of the purchase. If the price of Bitcoin drops to the price you predicted, then you have made a profit. Your profit represents the difference between your entry price and the price of Bitcoin at the expiry date. The good thing is that you only lose the amount you paid as a premium, although you could have made so much more if the price hit your target.
Options are widely regarded as complex products and are primarily used by institutional and sophisticated investors. Selling your Bitcoins is perhaps the simplest way to go short. If that happens, then you get more BTC than you initially had before the initial sale. The downside is that Bitcoin may fail to drop to the price you hoped to buy back in, and then you miss out on potential profits.
Investors are more likely to profit by shorting Bitcoin when the following market conditions happen:. Bearish News: The crypto market is highly responsive to either negative or positive mainstream news developments. If you want to short sell Bitcoin, then it might be best to do so when large-scale negative reports create a bearish sentiment in the market. Anyone who opened a short Bitcoin position just after the tweet realised considerable profits.
After a Massive Price Increase: Shorting Bitcoin can be a great short-term move after the cryptocurrency has recorded a significant price increase. Experienced traders rely on indicators such as where prices might hit resistance, and then open up a short-position at that level. Hedging: A short Bitcoin position provides a means for you to hedge losses on your Bitcoin holdings. If you hold Bitcoin through a bull market and feel like it is due for a price correction, but still do not want to sell your assets, then you can open a short position.
Market Volatility: Even the most significant Bitcoin price drops eventually recover and sometimes, faster than you may have imagined. If that happens, then you could lose your money in a short position. The fees are usually around 0. These fees affect your potential profits and may become even more significant when you hold the position for several days or weeks.
If you eventually have to close your profit at a loss, then these fees will also add up to the lost amount. The leading cryptocurrency has often found a way to bounce back from losses, leaving short traders scratching their heads. For Bitcoin put options, the contracts are usually priced in BTC and often start as low as 0. Longing Bitcoin is the opposite of shorting the asset. You long Bitcoin if you simply buy and hold the cryptocurrency with the goal of selling it at a higher price.
You can also open margined long positions on exchanges or buy BTC option contracts predicting a higher strike price than the current market value. Historically, holding a long-term short Bitcoin position is not a good idea.
However, experienced investors and traders can capitalise on predictable short-term price drops to make profits from shorting Bitcoin.
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