Shorting Cryptocurrency Explained: How To Make Money When The Market is Trending Down
For the newer trader, seeing red candles and negative percentage signs littering the ticker box can trigger worrisome emotional reflexes. The plaguing questions of “did I sell too late?”, or even “did I miss my opportunity?” tend to repeatedly edge their way into our psyche causing us to question our trading patterns and newly-founded strategies. But, on the opposite side of this token comes an age-old and time-tested understanding that experienced traders hold close to their heart — money can be made on both the upsides and the downsides of a market. In this instance, we’re going to need a few specific tools and techniques to make money on the downside, but the most important concept to familiarize yourself within this scenario is ‘shorting.’
Diving In…
Cryptocurrency has had rough past year and an even rougher past few months with the market underperforming week after week. Lots of money has been lost, but still there remains a group of people who continue to realize profits despite the apparent drought of green symbols.
When it comes to investing, there are two ways to profit from an investment. The most common and universally understood method is acquiring an asset, holding onto it for a period of time and then reselling it once the price has increased. This could be reworded as essentially betting on the value of an asset increasing over time, though there’s also a way to bet on the value of an asset as decreasing over time…. This is called shorting or short selling.
How It Works…
For example, today the price of Ethereum is $100. You have a hunch that the ETH market is going to fall through the floor so you borrow 5 ETH (we’ll get to where in a moment) and sell it for $500. After the market crashes to $10 per ETH, you take the money from your original sale, buyback and then repay the 5 ETH loan and keep the profit!
There are multiple ways to apply the ‘short’ concept to cryptocurrency, as listed below.
Margin Trading:
Margin trading is when you take a specific cryptocurrency loan from an exchange at the current market price, sell the loan and then after the market crashes, buy it back to profit. There will generally be a type of fee or interest associated with the loan as well as a limit on how much can be borrowed. This is very similar to our example and generally considered the most common way of shorting.
Places You Can Margin Trade:
Futures:
Futures in themselves are a fairly complex trading concept, though a boiled down version can explain them as two parties entering a contract to buy and sell a good for a set price on a certain date. For example, if the current price of ETH is $100 and you believe that it will fall to $10 in the next 2 weeks, futures allow you to enter into a contract to sell your ETH for $100 while everyone else is selling for $10! A buyer that believes the market will go up will think they’re getting to reserve ETH at a cheaper price for the future.
Places You Can Explore Futures:
Prediction Markets & Betting:
Prediction Markets are a form of betting where a gambler predicts the price of a cryptocurrency on a specific date, and if they are correct within a certain range, they are paid out. It’s possible to ‘short’ in that a trader can bet on the price dropping to a low by a certain date.
Popular Prediction Markets:
Shorting Thought Process…
In regards to cryptocurrency specifically, there tends to be a large amount of topical and positive information floating around in respect to any given project. For instance, it’s common to hear how a mysterious genius created Bitcoin and it’s going to change the world; previously enough to spark adequate emotion or investigative interest, garnering a purchase from an everyday consumer.
But did the vast majority of the people that purchased Bitcoin initially consider its network speed limitations? Or any of the other constricting factors that could lead to the concepts demise?
Shorting can prove difficult due to the fact that it requires intimate knowledge and a deep understanding of the topic at hand. After all, you can’t know and bet on failure and a decrease in value unless you’ve first internalized and criticized the fundamentals of the concept in question.
Shorting acts as a more advanced way of committing to and doubling down on your criticisms. In practice, if a trader believes that Bitcoin is going to be worth more than Monero, they can choose to both hold Bitcoin and short Monero — profiting in multiple ways, instead of just holding Bitcoin.
In the end…
Short selling can be an extremely useful tool to profit from a market that is in a downswing. Generally, it requires an intimate comprehension of the concept at hand in order to calculate specific weaknesses and then time those with the market. This can be done through margin trading, futures or even betting with prediction markets. Whenever there is movement in the market, that means that money can be made! It’s just up to the trader to be creative in their techniques and the tools that they apply.
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