The cryptocurrency market is one of the world’s largest financial markets, but it is also one of the most dynamic and changing. The downward side of it has the capacity to make the most experienced traders panic and follow the herd. Choosing an irrational strategy is a big mistake because falling markets offer great opportunities to profit from derivative products to those who know how to use them.
To avoid greater loss and keep your profits high, keep calm, and learn how to take advantage of falling prices and short your investments.
What Is Short-Selling?
To short a position means to take a loan to purchase an asset in order to sell it at the current price. When the value of an asset decreases, the trader buys it at a lower price, repays the loan, and makes a profit on the price difference.
Let’s take a look at this example:
- You short 10 bitcoins when the price is $5,000
- To make this happen, you borrow 10 bitcoins and sell them for $50,000
- Eventually, the price of a Bitcoin drops to $3,000
- You buy the 10 bitcoins again in order to repay the loan. 10 * $3,000= $30,000
- Calculate the profits: $50,000 – $30,000 = $20,000
For more examples, head over to this article on how to short Bitcoin.
How To Short Sell Cryptocurrency
Usually, you will have to contact a trading agency or platform. They should be able to sell the Bitcoins or other crypto to you from their own stock and make profits on the interest rate. Bear in mind that it doesn’t matter if the prices rise or fall, you will still have to return to the loan within the agreed timeframe. The conditions vary so make sure you read well all the rules and regulations before you short sell.
To know when the right time to sell, do the following:
- Analyze the market
- Follow the latest news and coin influencers and developers
- Watch out for any regulatory government interventions
- Mind the negative effects of the breach of crypto primitives
CFD – Contract for Difference
In some cases, you can avoid the long process of borrowing the coins, selling them, and then buying them back. Just pay the difference, and the deal is settled.
The Bitcoin exchange offers the traders a chance to short sell with leverage. This means that you could buy the bitcoins you want to short in credit. This type of temporary loan can help you to open a larger trade. This way, you get to participate in a bigger amount of funds, while investing a smaller amount of your own capital.
However, don’t go too heavy on this. On the one hand, you can increase your gains. On the other hand, your losses will also be increased.
Risks Of Short Selling
When a trader short sells, both the gains and the losses will exceed your initial investment. Let’s illustrate this with an example:
- You invest $5000 in bitcoin. The market collapses, and your losses will be limited to $5000 that you have put in.
- If you short-sell, a different logic applies. Say you short-sold $100 worth of bitcoin at the time when the price was $10 per coin. You can short 10 bitcoins at a trader’s company. The prices can go up or down, but if they go up, say to $5,000, you can calculate how much the 10 bitcoins that you have to pay back will cost.
Make sure to invest only when you are certain that the prices will drop, after careful market research and thorough technical analysis.
To Short Or Not To Short?
When the prices unexpectedly go down, most traders fall into the fallacy of emotional decision-making, which not only prevents them from securing their positions but makes them lose. Hopefully, our overview helped you learn how to take advantage of falling markets by going short and keep earning profits.
Overall, shorting the bitcoin or any other cryptocurrency is a risky business that can pay off if approached wisely. Even when the market fails, it’s a good strategy to safeguard your positions and even earn some more profit.
Shorting is recommended only to those traders who are well-adept at analyzing the dynamic and changing market of cryptocurrencies and can make quick decisions based on a thorough understanding of trends and the influencing events.
If you decide to short, choose a well-trusted company to assist you, and do not forget to invest only the money you can afford to lose.