For any crypto trader, it’s important to know how to profit from falling prices by opening a short position in BTC trading — short bitcoins.
You often hear about HODL and BTD strategies, but in the world of cryptocurrencies, shorting is much less discussed. Shorting is essentially the practice of betting on the price of a falling asset. Although, this is something more complicated than long speculation.
It’s quite easy to speculate for long. You just need to buy bitcoins and store them. However, shorting is a completely different process. In this article, we will show you how to short bitcoins to profit from a bear market.
How to Short Stocks in the Traditional Market?
To short in the stock market, a trader borrows shares and sells them instantly, assuming that their price will soon decrease. To close a position, they must buy back the shares.
The trader will benefit if the price of the shares actually decreases and they buy back the same number of shares to pay off their debt (also in the form of these shares). The payoff will be the difference between the selling price of the shares (when they borrowed them and immediately sold them) and the buyback price of the shares (after which they must return the repurchased shares to the one from whom they borrowed them).
If the share price rises, then the trader who tried to short will be at a loss. At the same time, the shares can grow any random number of times, and this is the risk of shorting.
How to Short Bitcoins and Cryptocurrencies?
Shorting in the cryptocurrency market is carried out through derivative contracts. A derivative contract is a financial contract whose price is determined by the underlying instrument. For example, a best-selling cryptocurrency derivative is a contract that tracks the price of Bitcoin against the US dollar.
When you buy a derivative it doesn’t mean that you own the underlying asset. It simply means that your financial position is affected by the price of the underlying asset. With derivatives, traders can use more advanced strategies than buying a real asset.
Derivatives allow traders to use leverage. Essentially, leverage means that the profitability of a trade can be increased through the use of borrowed funds. However, it also increases the risk.
It’s better to see this with an example.
Bitcoin Shorting Example
Imagine that Bitcoin sells for $1000 and you have $1000 to invest. That is, you can purchase the underlying asset 1 BTC.
If the price of Bitcoin increases by 10%, then the sum you invested also increases by 10%. On the other hand, if the price of Bitcoin decreases by 10%, then your investment will also depreciate by 10%.
Let’s say you decided to use your initial $1000 on a derivative contract rather than investing in real Bitcoin. A derivative contract allows 10x leverage.
This means that you can use $1000 to buy a derivative contract, which is similar to owning 10 bitcoins for a total of $10,000. You have $1000 of equity in position and $9000, which are essentially borrowed from an exchange.
If the price of Bitcoin increases by 10%, then the total cost will be $11,000, which means a 100% return on the initial investment — $1000 to $1000, and not 10% ($100) as in the scenario when you bought the underlying asset.
However, if the price of Bitcoin decreases to a certain point at which the value of your equity begins to approach zero, then the exchange will liquidate the position, and you will incur a 100% loss and will lose your $1000.
Useful Tips & Tricks for Newbies
Leading traders often share their experiences — they don’t mind giving advice and sharing information that can make life easier for newbies. The fall of cryptocurrency in price is a common phenomenon on which you can earn. And yet, in order to make a profit, and not lose your coins, you need to adhere to simple rules!
- Shorting cryptos while having little knowledge in the field of trading is a very bad idea. It’s better to study this topic in detail before you start investing money.
- It’s not recommended for newbies to practice a bet delay. This will lead to a slow but sure loss of money.
- Before opening a short position, you need to study the history of price changes. You must quickly identify the factors that can cause significant spikes in the value of a chosen asset.
- When trading on margin, you need to open positions carefully, trade deals must be justified.
It’s possible to make money on the BTC price decrease, moreover, it’s quite easy to do it. The main thing is to have patience and the necessary knowledge!
Opening short positions promises quite high profits, even against the background of a general market decline. If you trade on the stock exchange but don’t use shorts, then this is anything but full-fledged trading. Market participants must be able to make money under any circumstances and trends. For this, they need to be able to go both long and short.
Have you ever shorted BTC? Feel free to share your experience in the comments. Have a great weekend!