Is It The Best Time To Short Sell Bitcoin?
By Richard G on ALTCOIN MAGAZINE
Betting Against Digital Gold
In one of my previous articles, I described my point of view on the current cryptocurrency market conditions. I explained the Market Cycle phenomenon and its main stages.
I also provided my readers with an investment strategy which allows you to make money with minimal risks and take advantage of the situation.
However, the strategy I described is based on an assumption that Bitcoin and other cryptocurrencies are going to rise again sooner or later, entering a new stage of the bull market.
And although in my opinion, this is the most likely scenario, there are people who do not believe in a good future for crypto. Every time Bitcoin price goes down, they declare it to be the end.
For many, Bitcoin’s recent downward movements may actually support this pessimistic forecast. The total downward trend is still alive. What if the pessimists are right this time? What if the bull market never comes again? What should be your moves in that case?
Actually, there are trading strategies for many types of market conditions, as well as for many types of human personalities. Either you are an optimist or a pessimist, you can find a strategy you will be able to apply in accordance with your expectations on the market future.
From an optimistic investor’s point of view, the perfect time to buy Bitcoin at a cheap price is now.
But what a pessimist investor would do now?
One of the things you can do if you strongly believe that some asset is going to lose its price is to bet against it, or “short” it.
Going Short
Short selling is selling of an asset you don’t own. You borrow it from someone, and then you sell it at a certain price and wait for the price to decrease. After that, you buy it cheap and return to the owner.
In the traditional financial world, it goes the following way. You make a deal with a broker who manages stocks or another kind of commodities you are interested at. He allows you to borrow a certain amount of commodity, and you sell it at a certain price. Later, when its price has decreased, you buy it again and return to the broker. The total difference between buy and sell prices will be your profit.
It’s a risk because you can’t know for sure if the price drops over time. It’s possible that the price will rise instead and you’ll lose your funds.
An important detail: surely the broker won’t let you lose more than you can pay him back. And his main interest in this cooperation is getting payments from you for letting you borrow the assets.
As you know, cryptocurrency markets are quite different compared to traditional financial markets. How is it possible to short sell Bitcoin?
There are several ways to do it, including complicated financial instruments such as Futures and Binary Options, but in my opinion, the simplest and most convenient method is margin trading.
Margin trading is well-known in the traditional financial world, and it’s also quite popular in the world of cryptocurrency.
In this case, a crypto exchange allows you to extend your credit so that you could use these funds for trading. Having this opportunity you are able to trade with sums which are many times bigger than your original balance.
Let’s say that some exchange allows you to trade with a 10 to 1 margin. Then, if your original balance is 1 ETH, you will be able to operate with 10 ETH. It means that your potential profit will be 10 times bigger, as well as your potential losses.
The leverage rate varies between exchanges. For example, HitBTC exchange which provides the margin trading option through special Meta Trader 5 Terminal, makes it possible to trade with either 1:3 or 1:10 leverage.
But how can you short Bitcoin using margin trading?
It’s simple. You borrow a certain amount of BTC using this margin trading option and short sell it. If Bitcoin price decreases, you will be able to buy it again with the funds you operate and close your position. After that, you return the money you borrowed back to the exchange. The total difference between buy and sell prices you have after these operations will be your profit.
It’s noteworthy that exchanges have their own methods to prevent possible risks coming from this kind of cooperation. On the most of exchanges, if you lose money doing your trading operations, you won’t be able to trade after your losses come close to your original account balance. So your maximum risk when doing margin trading is the sum of money you initially have on your account.
Is It The Best Strategy Now?
In a 2015 Hollywood film “The Big Short” starring Christian Bale and Brad Pitt, short-selling of subprime loans was possibly the best option the main characters had. After detailed research, they knew for sure that the housing market would collapse soon, even though nobody believed them. So they made a huge profit betting against the housing market.
The situation we have now is somehow different. It’s hard to make an accurate prognosis on what is going to happen to Bitcoin price in the next several months. The falling tendency may continue for a long time, or it may finish soon and we will have the bull market going on again. I won’t try to estimate the probability of each scenario here, as it may be an impossible task.
I would also like to point out that I’m not a big fan of apocalyptic theories. In my opinion, the cryptocurrency bull market is inevitable. As I said earlier, the interest for cryptocurrency is still high enough and I really think that making a long time investment in crypto is the best option now.
But this is my personal point of view. And my readers deserve to have full knowledge in order to be prepared for any kind of market conditions.
So let’s say if you are an optimist like me, you should invest now with a good risk management strategy. But if you are a pessimist and strongly believe that the cryptocurrency market is going to collapse, you can start to short sell.
Another important thing you need to know is that for any market the growth phase usually lasts much longer than the falling phase. On the screenshot, you can see the S&P500 index chart in the times of the dot-com bubble. It’s clear that the downward movements are much steeper and shorter than the upward ones. You won’t be able to short for a long time. So be prepared to act quickly and at the right moment.
Richard Godard
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