Shorting Strategy in Crypto Trading
Making a profit from cryptocurrency trading tends to be the result of a rise or drop in a specific coin’s price. The “going short” strategy allows traders to benefit from a price dip, as they basically bet against the coin in the belief that its value will decrease to their benefit.
For example, someone adopting the shorting strategy may choose to bet that Litecoin would experience a sharp decrease in price ahead of the trend stabilizing. Typically, traders will adopt a shorting strategy without holding the asset itself.
Shorting Strategies for Cryptocurrency Trading
A future is a contract recommending that the trader purchase a specific asset at a certain price on a given date. When a trader sells an asset future, they are betting on a price drop without directly dealing with the relevant asset.
A number of futures exchanges enable traders to deal with loss or profit values in fiat money, though it’s less popular than alternatives.
In margin trading, traders expecting asset price drops will borrow said asset and sell at a higher price, before buying it back after the value dips (making the difference in price their profit).
Cryptocurrency traders will utilize a crypto exchange for borrowing an asset. This will link them with a lender or lend the assets to them directly instead (interest rates usually apply). As a result, a trader will be restricted by the exchange’s own borrowing caps.
Because there’s an opportunity to trade with more assets than the trader actually owns, margin trading is the most popular way to short. However, interest rates and commissions must be remembered: they reduce the profit earned after a drop in price.
Contract for Difference
A contract for difference (CFD) is considered the best way to bet on a currency without actually taking ownership, as it’s a direct bet on the trend which the market settles without a trader needing to purchase, sell, or even borrow it themselves.
Contract for differences may not be cryptos themselves, and perform in a way which resembles fiat funds more than cryptocurrencies. So, a trader has no reason to stress over the asset’s liquidity, as a CFD is a measure of an asset’s value difference.
Short selling directly
This final option differs from those covered above, as it actually requires traders own and sell the relevant coin. Traders in this case aim to sell at a high value and purchase at a low one, working with whatever market fluctuations occur beyond this.
As a result, a trader takes control of all assets involved, though they’re required to purchase it initially. And if the trade fails to generate the results required, the asset will be lost entirely.
Direct shorting is more streamlined with automated trading. Traders can deal with higher prices but profits will be gained more slowly and the risk factors are substantial. On top of a cryptocurrency’s price decreasing, it has to rebound afterwards to prevent the trader being left with a low-value asset and losing out on their shorting-driven profit.
What are the Pros and Cons of Short Strategies
There’s real potential for profit in betting against assets, particularly when a trader predicts price dips after a sustained upward trend. Value dips are expected on the cryptocurrency market, and so there are plenty of opportunities for shorting.
But if you experience a bad outcome from a short strategy, there’s no limit to the amount of loss you could suffer. The value of an asset borrowed may rise and a trader will be bound by time limits on an asset’s return — forcing them to purchase an asset at a higher cost than expected. The cryptocurrency market’s volatility could lead to losses that make a massive negative impact on the trader’s portfolio.
Essential Tips for Short Strategies in Cryptocurrency Trading
Any trader who decides to try shorting cryptocurrency assets for themselves should keep certain key factors in mind. Money management is one of the most important, as the lack of certainty can lead to serious losses with borrowed assets. A trader should set boundaries to minimize damage and ensure the entire portfolio covers it.
Furthermore, choosing the right asset is critical. You may feel tempted to work with more than one at the same time, but a lot of coins trace others’ market activities, which can create an unsafe environment for shorting multiple coins predicted to follow an identical trend.
Crucially, a trader should take care when following market behavior: as shorting is so popular, numerous traders will aim to gain profit from drops in price alongside each other. When traders relying on shorting decide to buy back, the resulting surge in price can cause traders acting less quickly to fall into negative situations.