In the utopia of enthusiasts, the value of bitcoin is constantly rising. However, the first coin can show a drawdown and pull most of the market with it. Few traders know how to play on the downside, but this is not the only way to capitalize on bitcoin’s fall. If the user prepares for a negative scenario in advance, they will benefit.
What is a bearish trend in the cryptocurrency market
All traders are divided into 2 groups. Bulls bet on longs – the growth of the position, and bears on shorts – the decrease in price. Each group tries to tilt the value in its favor. Bearish trend means a long decline in quotes. Minor drawdowns are called correction. If the price has sharply increased by 20%, the rate will decrease by 2-3%. The market gives an opportunity to earn at any conjuncture. It does not matter whether the cost is rising or flying down: if a trader knows how to use the entire range of investment instruments, he will be able to find a profitable deal.
How to earn on the fall of cryptocurrency
Cyclicality was the reason for the emergence of scenarios. Because of repeated events, traders already have ready-made instructions with possible options.
Buying assets at a low cost
Cryptocurrencies are characterized by high volatility. It sometimes leads to various anomalies – for example, on one exchange, the value of an asset can fall by 80%, and then return to its previous value. This is possible due to a sudden surge in trader activity, software flaws, etc. Among the major anomalies is the 90% decrease in the value of BTC on the Binance US exchange at the end of October 2021. The price of the first coin dropped to the $8200 mark, but then quickly returned to $65,000. Some of the users caught the luck by the tail.
The trading platform has not commented on such an anomaly. There are 2 main versions – technical problems and selling a large amount of BTC on the market. It is almost impossible to predict such events, so you can’t make money on shorting. They use a different approach:
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- Choose trading pairs with high volatility – the higher the probability of breaking the support, the better.
- A grid of orders is placed – several orders are created below the current price with an interval of 5-10%.
Buying derivatives
Most beginners trade on the spot market. Because of this, they have the only available option – buying an asset. Derivatives are financial contracts on the value of cryptocurrency that empower traders. They are divided into several types:
| Derivative | Description |
|---|---|
| Futures | A contract to buy or sell an asset in the future at a set value. Cryptocurrency exchanges use open-ended futures – positions can be closed at any time. |
| Forward | An over-the-counter contract for buying and selling. It is similar to a futures contract, but is intended for OTC trading. |
| Option | Gives the trader the right to buy an asset at an agreed value. |
| Swap | A double futures contract that consists of a contract to buy an underlying asset and sell it in the future. |
| CFD | A derivative on the difference in the value of an asset. If the price falls, the losses are paid by the buyer, in case of growth the costs fall on the seller. |
Many major exchanges offer to earn on the fall of cryptocurrency with the help of derivatives. Contracts are available on Binance, Kraken, OKEx, Huobi and other platforms.
Investment bank contracts
In a scene from the 2015 movie “The Downgrade Game,” a pair of traders want to make a trade against the real estate market. An investment bank can create a contract for any asset, and the client can bet on a certain outcome.
Goldman Sachs has long been popular among major cryptocurrency players. The bank offers the same derivatives as cryptocurrency exchanges, but the contracts are only available to professional investors.
At the end of 2017, bitcoin futures appeared on the US CME exchange. Some analysts are convinced that they were the main reason for the fall of BTC. In December 2017, the first coin updated the historical maximum, approaching $20,000. Professional traders noticed the overbought market and started shorting en masse, which led to a rapid fall.
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Buying stocks whose value depends on the price of BTC
The first cryptocurrency acts as a flagship. At the end of 2021, it represents more than 40% of the capitalization of the entire market. The rate of BTC affects other coins. Attention should be paid to: Coins with smaller capitalization have a high growth potential. If they start to receive as much investment as Bitcoin, their price will increase many times over. To diversify risks, capital is divided among several assets.
Tips for playing on the downside
In a falling market, make money with the help of margin trading. The exchange provides any asset as collateral, it is sold, and after the fall it is bought back to repay the loan. The trader keeps the difference as profit. Tips for playing down:
- Monitor the market. Beginners are not recommended to use leverage and derivatives. It is not only the complexity of the instruments, but also the lack of market monitoring. It is better for a trader to initially make transactions on the spot cryptocurrency exchange until he learns to notice patterns.
- Risk Management. A trader should not allow his capital to be completely drained, otherwise his game is over. Several ways will help to avoid this: trades at 20-30% of the total capital or Stop Loss – closing the position at cryptocurrency drawdown.
- Analysis. Indicators will tell about the fall – for example, moving averages. Large losses are noticed with the help of fundamental analysis. Large-scale events always affect the further movement of the price of bitcoin and other coins.
- Profit taking. Short positions are usually closed faster than longs. In the cryptocurrency market, the bearish trend can end at any moment, after which the price will go up. With Take Profit, it is better to set the profit amount in advance and close the trade.
Summary
In a rising market, playing down is considered risky. Most investors find it easier to buy an asset with a 3-5 year growth perspective rather than trying to capitalize on fluctuations. Instead of short positions, open buy orders to pick up coins at a low cost.
Frequently Asked Questions
💵 Who can make money on cryptocurrencies falling on an exchange?
Futures trading is available to all registered users. In some cases, a small test or verification is required.
❓ What is the minimum position size for futures?
The amount depends on the rules of the exchange. On Binance, trades can be made from $10.
❕ Why is cryptocurrency falling?
The value of the asset depends on supply and demand. If no one wants to buy a coin, its price will drop to 0.
💰 How much do they earn on the fall?
If a trader made a downside bet without leverage, his profit is equal to the percentage of the decline in value since the trade, excluding commissions. A leverage of x20 increases the income in proportion to the decline by 20 times.
⛔ Are derivatives available for any asset?
No. Usually trading platforms select cryptocurrencies with the highest liquidity. The maximum amount of leverage also depends on this.
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