“Shorts in the game for a fall” - how to make money on falling quotes of cryptoassets?

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28.01.2022
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Short cryptocurrency.

In the investment market, market participants choose different strategies for earning money, but in general, their desire comes down to the opportunity to make a profit. In the case of, for example, a protracted “bear market”, traders, hoping to gain profit, begin to “short” their positions.

The word short itself comes from the English term with a similar sound “short” and means “short. Already in the word itself lies the essence of the strategy, which can be described as the desire to make the fastest possible transactions. That is, shorting is a strategy of a market participant who seeks to sell an asset as quickly as possible at the current price before the predicted decline in quotations in order to capitalize on the price difference.

Let us consider in more detail the features of this strategy and the principle of its operation on the cryptocurrency exchange.

What is shorting on a cryptocurrency exchange

The shorting strategy, in other words, the game for a fall, is as follows: a trader, confident that the asset he is going to trade will fall in price, opens a short (short) position and promptly concludes a deal to sell it at the current value.

The concept of shorting, which originated on stock exchanges, over time began to be applied also in other areas, including in the field of cryptocurrencies. So, shorting on the cryptocurrency exchange just means opening short positions in anticipation of a decline in the quotes of a certain asset. This means submitting an order to sell an asset borrowed from a broker or exchange. After the transaction, the debts are repaid, and the amount remaining in the trader's account is his profit.

It is worth noting that this strategy, often called “bearish”, has become very popular when working with crypto.

Short in crypto: conditions

The implementation of the strategy under consideration implies the presence of some difficulties when opening regular and successful short orders. So, this requires the ability to analyze the market and the ability to make accurate forecasts.

In addition, to avoid pressure from experienced players, it is recommended to avoid entering the market in the first and last hours of trading sessions and not to sell at the top of the rally.

Also, the following conditions are necessary for the “bearing game”:

  • The presence of a certain volatility of the asset (trend, stable price change in a certain direction or flat, price fluctuations in a less stable range).
  • High liquidity of the used cryptocurrency.
  • Analysis of price changes for a certain period.
  • Understanding the risk and possibility of losing a deposit.

How to short cryptocurrency

It is advisable to set short positions for bitcoin and other cryptocurrencies only after studying the basics of trading and a thorough analysis of the selected asset. The main mistake of beginners is an attempt to trade based on intuition and luck. Meanwhile, given the volatility of most crypto assets, this approach is more than reckless. Only after careful preparation and studying at least the basics of trading, you may pass directly to trading.

The first of its stages is the search for suitable sites. A trader needs an exchange that offers trading with leverage. With the availability of exclusively spot trading on the site, there will be no possibility of earning on falling quotes.

Next comes the stage of creating an account and passing verification (identity verification).

The next step is to make a deposit and wait for the funds to be credited.

After that, there is a choice of a margin trading section, an asset of interest, as well as a market analysis.

Only after all this, an application for the sale of the asset is sent. It all ends with the expectation of a predicted fall in quotes and the closing of a deal with profit taking.

In general, the secret of successful shorting is the ability to choose the right moment to close the trade, as well as the ability of the trader to remain calm at all stages.

Cryptocurrency short trading: possible risks

When deciding to go short, a market participant should take into account the following features:

  • Crypto assets are highly volatile and their price can change at any time. Even the most experienced traders are not immune from this.
  • Each exchange has its own list of assets available for shorting (provided that the platform is not engaged in spot trading, as already noted previously).
  • Short trades should be calculated taking into account the trading and margin commissions. Otherwise, you can go into the red even in the case of successful operations.

It is also important to remember that there is practically no limit to losses when trading short positions, which is why it is so important to be calm and careful when trading short, especially when using leverage. On many exchanges, for example, on Binance, before starting work, it is proposed to pass a special test on the knowledge of the features of margin trading to make sure that the user understands the possible risks of using leverage.

The following pieces of advice may also help to reduce possible risks partially:

  • Diversify your investments.
  • Make sure your personal exchange account is safe.
  • Do not use illiquid assets for trading.

Conclusion:

Thus, shorting is a strategy where both possible profit and possible losses are almost limitless. At the same time, in general, trading both in short positions and in long positions is a full-fledged component of the general skill of a trader.

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