From the LBank blog.
Volatility is one of the most exciting features of the crypto market. In 2021 alone, Bitcoin experienced lows of $29,000 and highs of $67,500. The growth of smaller coins was even more remarkable. Solana, for example, rose from $1 to $259… only to crash to $16 by early 2023.
Now, obviously, with the whole crypto market knocking around at an all-time low and the economy slowing a tad, the talk on the cocktail party circuit isn’t about the declining assets; it’s more about how to profit from the market even during the bear season.
Basically, short selling is a strategy that allows you to profit from a falling market, a falling sector or a falling industry. The term “shorting” is not new. In fact, it has been used in virtually every financial market — options, commodities, futures and currencies. Short selling is a way to capitalize on the market’s volatility while not wasting time if the market falls. Read on to understand how it works.
In simple terms, short selling is a trading strategy that involves selling assets not necessarily owned by the seller in hopes that the price will keep falling. More specifically, it is the short sale of a crypto asset in anticipation of a decline in its price. It is the direct opposite of long. When you “long” an asset, you anticipate an increase in the price of the asset.
How can one possibly sell a coin before buying it? Does that mean you are selling an asset you don’t currently own? In a word, yes. You can think of this as a car business.
So, for this short-selling-cars analogy, go to a car rental place and rent a car for an extended period of time. Then, sell the car to a third party. After that person drives the car for a while, the car will depreciate, repurchase the car from the third party and return it to the rental agency.
This example won’t work in real life because the rental fees will almost certainly be much higher than the amount you make from buying and selling the car. Also, you don’t get the title when you rent a car, so you can’t legally sell it. The process is a similar concept but slightly different from the crypto market. Instead of borrowing real funds from an exchange platform, you can use derivatives like futures contracts, margins or contracts for difference (CFDs) to short crypto.
Ultimately, with these derivatives, traders can predict the price movements of a particular cryptocurrency without actually owning it. This way, they can maximize their profits even in a bear market.
With the recent downturn in the crypto markets all through 2022, you are not wrong if you are looking for ways to profit from downward price movements. Shorting crypto is a good strategy to go about this. One simple way to short-sell crypto is by selling high and buying. However, beyond this, traders can short-sell by exploring derivatives products such as futures contracts or options on crypto-related stocks or ETFs. Let’s explore how they work.
Basically, Margin involves leverage or borrowed funds, which can boost profits or intensify losses. Margin trading enables traders to buy and sell crypto on a reputable crypto exchange such as LBank while only risking a smaller amount of capital. Leverage is usually shown in ratios, such as 20:1 or 100:1.
So, for example, if your trading account has $3000, and you want to open a short position with a 100:1 leverage ratio. That means you’ll provide a certain percentage of collateral. The crypto exchange platform will provide the remaining to fill up your orders.
In other words, Margin is the amount of crypto you need to enter into a leveraged position.
In a futures trade, a seller agrees to short-sell an asset with a contract, which reflects when and at what price the asset will be bought. In simple words, selling a futures contract means expecting that the asset price will drop; this suggests a bearish mindset and a prediction that you will get a good market share.
CFD essentially means contract for differences. It is a short-selling strategy that allows traders to make profits on the price differences between the open and closing prices of an asset. For example, if Bitcoin is trading at $30,000, you short-sell it and later close your position when the price reaches $25,000. So you made a profit of $5000.
Shorting, or short selling — the process of borrowing stock to sell and then buying back at a lower price — gives day traders a way to make money when prices are falling. That means double the potential number of trades available, a huge benefit. There are several advantages as well as risks to shorting crypto.
Hedging is one such major reward of short-selling. Hedging is the practice of diversifying positions such that should make the market move significantly in one direction or another; the trader is covered either way. For example, a trader who has bought bitcoin but wants to safeguard the position against a market downturn can use derivatives trading strategies to make profits if the actual price of bitcoin drops. Hedging can be performed by diversifying between market sectors as well as direction.
Leveraged position: Traders with a huge risk appetite are drawn to volatile assets like bitcoin contacts to make massive profits and equally huge losses. Without a proper and well-structured approach to studying the market, you can incur unlimited losses.
In cases where the market goes sideways, the exchange platforms will usually liquidate the trader’s position at the point where it becomes clear that they do not have sufficient funds to cover the marginalized position.
Ultimately, even though it is worth noting that short selling is an essential weapon in the trader’s armory, the ratio of maximum risk versus maximum profit potential is directly proportional.
Traders can short crypto on LBank. The top trading platform allows you to buy Bitcoin futures contracts, margin contracts and much more. Additionally, the exchange understands that shorting crypto is a good way to earn profits, but it’s an advanced strategy; as a result, it is committed to educating users about the concepts.
Disclaimer: The opinions expressed in this blog are solely those of the writer and not of this platform.
This article came directly from the LBank blog, found on https://medium.com/lbank/shorting-bitcoin-and-other-cryptocurrencies-beginners-ultimate-guide-e62ca3ff409f?source=rss—-69b5b1a654b1—4