The basic principle of trading is to buy cheaper and sell dearer. Users buy cryptoassets and hold them until the price reaches a new high. But traders can also make money on falling prices. In that case, users should short bitcoin – trading in anticipation of a decline in the asset’s price. This strategy is different from regular trades, but it is available on many exchanges and can be used even by beginners.
Cryptocurrency Short
Traders often use the terms Long (long or bullish position) and Short (bearish strategy). To avoid confusion over these words, it is important to understand what they mean.
Key terms
Long (bullish position) – buying tokens and coins. It is used if the cryptotrader is confident in the growth of quotations. Buyers are called bulls on the exchange. According to one version, it has to do with the appearance and behavior of the animal. During a fight, bulls hit their opponent from the bottom up, trying to prick him with their horns. Traders standing in a long position similarly try to raise the quotation of the asset.
Short (bearish strategy) – actions of user to sell crypto-asset in the expectation that the price will soon decrease.
Trend – dominant mood of traders and investors on the market. If the number of buyers on crypto exchanges increases, the price of the instrument goes up. In this case, we speak of an uptrend, or a bullish trend. If the price of the crypto-asset falls, the dynamics are called bearish.
Spot – a type of transactions in which acquired coins are credited to the buyer’s wallet on terms of immediate payment. An example is converting fiat currency into cryptocurrency through an exchanger. The buyer immediately gives money to the counterparty, receiving tokens or coins to the wallet in return.
A derivative is a derivative financial instrument. It is a contract in which the parties undertake to perform certain actions to purchase or sell cryptocurrency. Derivatives include futures, options, and swaps. These transactions differ from spot transactions because payment does not occur immediately, but at a set time.
A futures contract is a contract in which payment is made in the future but at a predetermined price.
Leverage – the borrowed funds, which the exchange temporarily provides the user for trading operations. This money cannot be withdrawn to a personal account and can only be used for the purchase of assets.
Margin trading – trading with leverage.
Peculiarities of shorting
The easiest way to trade – the opening of long positions on the spot market. If the trader expects further growth of quotations, he performs the following actions:
- Determines to what level the chart can reach.
- Opens an order (buy order), specifying the volume of transaction and type of operation.
- Waiting for the cryptocurrency to be credited to his personal account.
- Monitors the chart of the trading pair.
- Sells the asset as soon as its price has reached the desired level. Among traders, this is called profit taking.
Shorting Bitcoin (BTC) is a more complex operation. The peculiarity of short positions is that usually the user does not have a sellable asset at the time of opening the transaction. But earning on falling quotes is possible. There are 2 ways of trading for this purpose:
- Trading with leverage. The user borrows coins from the exchange, which he immediately sells. If the forecast is correct and the rate of the cryptocurrency decreases, the trader makes an opposite transaction. Having bought bitcoins that have fallen in price, the user returns them to the exchange. The difference between the purchase and sale price is the trader’s profit.
- Trading derivatives (futures or options). The terms of these contracts spell out the profit to be received by the owner if the asset price changes in the desired direction. For example, the seller of a BTC futures will earn if the price of bitcoins drops. In this case, he will sell the coins at a better rate. Futures contracts without delivery are common on cryptocurrency exchanges. This means that if the trader’s prediction of a drop in quotes was correct, he will immediately receive a profit in his account. The tokens and coins themselves are not transferred between wallets, but serve only as the basis of the contract, from the price of which the user’s income is calculated.