The basic principle of trading is to buy cheaper, sell more expensive. Users buy crypto-assets and hold them until the price reaches a new high. But traders can also earn on falling quotes. In this case, users should short bitcoin – trade in anticipation of a decline in the price of the asset. This strategy is different from regular trades, but it is available on many exchanges and can be used even by beginners.
Shorting cryptocurrency
Traders often use the terms Long (long, or bullish position) and Short (bearish strategy). In order not to be confused by these words, you should immediately understand their meaning.
Basic terms
Long (bullish position) – buying tokens and coins. It is used if the cryptotrader is confident in the growth of quotes. Bulls on the exchange are called buyers. According to one version, this is due to the appearance and behavior of the animal. During a fight, bulls hit the opponent from bottom to top, trying to jab him with their horns. Traders standing in a long position similarly try to raise the quotes of the asset.
Shorting (bearish strategy) – user’s actions to sell a cryptoasset in the expectation that the price will soon decrease.
Trend – the dominant mood of traders and investors in the market. If the number of buyers on crypto exchanges increases, the price of the instrument rises. In such a case, it is said about an uptrend, or bullish trend. If the price of a cryptoasset falls, the dynamics is called bearish.
Spot – a type of transaction in which the purchased coins are credited to the buyer’s wallet on the terms of immediate payment. As an example, you can convert fiat into cryptocurrency through an exchanger. The buyer immediately gives money to the counterparty, receiving tokens or coins to the wallet in return.
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Derivative is a derivative financial instrument. It is a contract, the parties to which undertake to perform certain actions to purchase or sell cryptocurrency. Derivatives include futures, options and swaps. These transactions differ from spot transactions because payment is not immediate, but at a set time.
Futures is a contract under the terms of which settlement is made in the future, but at a predetermined price.
Leverage (leverage) – borrowed funds that the exchange temporarily provides to the user for trading operations. This money cannot be withdrawn to a personal account and can only be used to purchase assets.
Margin trading – trading with the use of leverage.
Features of shorting
The easiest way to trade is to open long positions on the spot market. If the trader expects further growth in quotations, he performs such actions:
Determines to what level the chart can reach.
Opens an order (purchase order ), specifying the volume of the transaction and the type of operation.
Waits 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 the user usually does not have the asset being sold at the time of opening the transaction. But earning on the fall of quotes is possible. There are 2 ways of trading for this purpose:
Leveraged trading. The user borrows coins from the exchange, which he immediately sells. If the forecast turned out to be correct and the cryptocurrency rate decreased, the trader makes a transaction opposite in direction. Having bought cheaper bitcoins, 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 prescribe the profit that the owner will receive if the rate of the asset changes in the desired direction. For example, the seller of BTC futures will earn on the condition that the price of bitcoins falls. In this case, he will sell the coins at a more favorable rate. Non-deliverable futures contracts are common on crypto exchanges. This means that if the trader’s prediction on the fall of quotes was correct, he will immediately receive a profit on the account. The tokens and coins themselves are not transferred between wallets, but only serve as the base of the contract, from the price of which the user’s income is calculated.
Profitability
Shorting cryptocurrency on the exchange can bring a high income. The following factors influence the amount of profit:
Competent market analysis. To determine the trend and make a forecast, it is necessary to follow the news, statements of experts. In addition, professionals use technical analysis indicators and other tools to predict the dynamics of quotes.
Leverage. If the exchange provides borrowed funds, the cryptotrader has the opportunity to increase capital. The size of leverage is usually indicated with the letter x. If the platform provides leverage in the amount of x100, then, having invested $1, a crypto trader can conclude a deal with a volume of up to $100. However, the risk of losing money increases in proportion to the growth of leverage.
Trading conditions of the exchange. The lower the commissions, fees, deposit costs, the more profitable it is to make deals. Usually platforms provide the best conditions for clients with a high volume of transactions.
Beginners should remember that no strategy guarantees profit. In any case, there remains the risk of losing money. Therefore, you should not engage in crypto trading if the reduction of capital will put the user or his loved ones in a difficult financial situation.
How to short BTC and other cryptocurrency
The first thing to start earning money by selling tokens and coins is to learn the basics of trading. A common mistake of beginners is trying to trade relying on luck or intuition. Shorting cryptocurrency on the exchange is possible only after a thorough market analysis, if the user is confident in the fall of quotes of BTC and other assets.
Stages of action
Shorting cryptocurrency is available on many exchanges. As of 2021, Binance and other platforms provided leveraged trading. To make money on a drop in the quotes of a cryptoasset with the help of margin trading, you should follow these steps:
Select an exchange where leveraged trades are conducted. If only spot trading is available on the platform, the user will not be able to earn on the drop in quotes.
Create an account and undergo verification (identity verification).
Make a deposit and wait for the money to be credited.
Go to the section “Margin trading”, or Margin trade. Some exchanges require you to pass a test to get leverage. This allows you to make sure that a novice trader understands how to trade without unnecessary risk.
Select an asset (token or coin) and perform a market analysis.
Fill out an order form and send a request to sell the cryptocurrency.
Setting up USDT to BTC exchange parameters
Wait for the quotes to fall and close the transaction, having fixed the profit.
Risk mitigation and strategies
There is no way to profit from every action. The secret of successful shorting is the ability to choose the moment to sell an asset and the trader’s ability to stay calm during transactions.
There are the following methods of risk reduction:
Name
Essence
Control over the size of leverage
The higher the leverage, the greater the risk. When trading with x100 leverage, a 1% change in quotes in the opposite direction will result in loss of deposit. Beginners should not trade with maximum leverage.
Limiting losses
On many exchanges in the order form you can set a stop loss (SL) parameter. This is an indicator of the maximum loss at which the trade will be closed. Trading with stop-loss orders allows you to lock in losses after incorrect market analysis.
Automatic closing of profitable trades
In parallel with SL settings, many platforms provide the ability to place Take Profit (TP) orders. These orders fix profit after quotes reach the desired level. Timely closing of positions protects the trader from a possible trend change.
Similar methods are used when trading derivatives. If the purchase of futures with leverage is available on the exchange, the risk of capital loss will depend on the ratio of borrowed and personal money. To protect your investment, you should close unprofitable trades and record income in a timely manner.
Example of trading using Stop Loss and Take Profit
The best exchanges for opening short positions
In November 2021, margin trading and derivatives trades were available on platforms such as:
Binance. The largest crypto exchange in terms of average daily transaction volume and number of assets. Margin trading with leverage up to X100 and derivatives transactions are available.
Currency.com. Belarusian platform providing services to users from CIS countries. Currency.com clients can trade with leverage up to x500.
Cex.io. A platform that provides traders with borrowed funds for making transactions. In 2021, the maximum leverage is x100.
Bitfinex. One of the oldest crypto exchanges. Founded in 2012 by Hong Kong-based iFinex. Provides access to buy cryptocurrency derivatives, including futures and options.
Poloniex. A US-based platform that has been operating since 2014. Allows clients to enter into spot and derivatives transactions with leverage up to x100.
Recommendations for beginners
A common mistake of beginners is trying to trade without preliminary analysis. As soon as a trader tries to make deals relying on intuition, he starts losing money. An attempt to sell cryptocurrency following the opinions of other users or analysts leads to a similar result.
Any forecast can be wrong, so the best way to make money on shorting tokens and coins is skillful independent analysis. It takes time to learn how to trade. But this is the only method in which the user has a chance to make money.
Another common mistake is the inability to control risks. If the operation brings a loss, it is urgent to stop trading and understand why the error occurred. Beginners are characterized by excessive emotions and the desire to make money instantly. This leads to the fact that the trader starts sending new orders, trying to recoup the loss. Such actions most often only aggravate the problem.
In addition, beginners are advised to:
Carefully choose an exchange. When rating platforms, the number of available trading pairs, the volume of transactions, feedback from other clients are taken into account. The better the conditions on the exchange, the more profitable the trader’s operations.
Control risks. Do not overestimate the size of the leverage used.
Choose the most stable and popular cryptocurrencies. For such coins as Bitcoin, Ethereum, Ripple, Solana it is easy to find statistics and analytical materials. Selling little-known tokens and coins carries additional risk, as it is more difficult to predict the dynamics of their quotes.
Alternate between longs and shorts. Cryptocurrencies are characterized by frequent changes in trends. Analyzing the chart, you should not try to mentally convince yourself that the rate will decrease. If an uptrend has started on the market, it is recommended to consider opportunities to buy cryptocurrency. In such situations, it is dangerous to short, as rising quotes can quickly nullify a beginner’s deposit.
Another piece of advice that should be given to beginners is that you should not rush. Beginners often try to multiply capital at once. But crypto trading brings profit only if you open transactions accurately. If a trader does not understand in which direction the chart will move, it is recommended to suspend trading.
Frequently asked questions
🔻 Which cryptocurrencies are better to short?
Beginners should sell known assets. In 2021, such cryptocurrencies include Bitcoin, Ethereum, Solana, and Polkadot. In addition, it is advisable to choose the most outdated and unpromising coins for shorting. If cryptoexperts say that a blockchain has exhausted its possibilities, it means that the probability of collapse of its quotes increases.
🤷♂️ What brings more profit – long or short?
Both ways of trading allow you to earn, provided that the trader correctly predicted the change in quotes. Both long and short positions can be opened using leverage.
🤔 What is better for beginners – margin trading or futures?
Cryptocurrency derivatives have a drawback. It can be difficult for beginners to understand the terms and characteristics of the contracts. Beginners should practice their skills on a demo account. Then it is possible to switch to spot trading. Only after that it makes sense to try to make money on margin trading.
❓ Why is shorting not possible on all exchanges?
Many regulators prohibit crypto platforms from providing borrowed money to clients. This is due to the increased risk of losing a deposit. Regulated crypto exchanges from the US, UK, Europe and Japan often only allow spot transactions.
👇 When will the price of BTC collapse?
There is no exact answer to this question. According to some experts, the cryptozyme (a long and deep decline in the quotations of digital currencies) may begin in the near future (from the beginning of 2022).
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