Cryptocurrency markets, like any other trading markets (Forex, stocks and bonds), are subject to market swings in both directions, up and down. Short selling refers to a type of trading in which an investor attempts to profit from a decline in asset prices. Some traders oppose short selling in the market, calling it "terrible", as they believe that trading consists of buying low and selling high for a later reward. Traders who want to benefit from trading crypto assets, on the other hand, should avoid these self-limiting biases and emotions.
In the field of bitcoin, learning to sell short is essential to becoming a complete trader. The current price drop bitcoin assets in 2022 is proof enough that you could benefit from a market collapse. This article will teach you how to short sell cryptocurrencies, as well as the best crypto exchanges to short, as well as the dangers and rewards associated with it. It will also cover everything you need to know to start making money as a day trader (often trading within a day for profit).
What is a short sale of cryptocurrencies?
Short selling a cryptocurrency is selling a cryptocurrency asset at a certain market price in order to buy it at a lower price. The premise behind shorting is that a trader lacks the cash to buy cryptocurrencies and then sell them later at a better price. To execute a short trade, a trader often borrows crypto assets from a broker or exchange. When a trader sells high and buys low in the underlying asset, he keeps the difference in price. However, this is only after the borrowed money is paid back and the transaction opening fees are paid. A merchant, on the other hand, loses money when the price of an item rises relative to its selling price.
Connect with our best brokers
Register your account through TopBrokeri.com and the Top account manager will help you get started with your account!
Shorting is the reverse of opening a long position (placing an order to buy a crypto asset in order to sell it at a higher market value). If you want to make a trade, you need to be aware of the difference between the two.
Although shorting bitcoin is a dangerous venture due to its extreme volatility, it can pay off well if done correctly. By using the right tactics, traders can gain the necessary experience to trade and earn from bitcoin shorting. After that, you will learn the steps you should take before opening any position, short or long.
Cryptocurrency Short Selling Strategies
There are many important variables to consider before you start short trading. Here are some examples:
Double top
The double top pattern is a great approach to determine if a crypto asset is suitable for shorting. Traders may enter a short position when the price of the asset rises dramatically, followed by a period of stabilization, and then another rally in price that fails to reach a new high. In this example, this indicates that the market's uptrend may be coming to an end, which is ideal for shorting.
Pools of cryptocurrencies
When a cryptocurrency boom occurs, the value of the cryptocurrency rises to levels where it becomes overbought. Typically, there is a lot of enthusiasm around crypto assets at this time, causing them to skyrocket. When the buzz dies down, the price returns to its previous level, providing an opportunity for the lower price traders to profit. The RSI indicator, among other things, can help you determine if a crypto asset is overbought.
Head and shoulders
The head and shoulders pattern is a technical indicator that indicates a reversal of the market trend. A trend reversal is shown by three points on a crypto asset chart: a central high point that marks the head, surrounded by two points of almost equal height. When you see this on a cryptocurrency chart, it is often followed by a drop in price. Before you place a short contract, check if the asset is in decline.
Technical analysis
Use technical analysis making trading decisions is an important activity that every trader should engage in. Technical analysis on a chart shows the market trend and traders' judgments. This includes real-time data analysis to predict how the bitcoin market will behave in the future. Traders take into account factors such as the currency pair's past performance, movement and transaction volume. The most common premise of technical analysis is that prices and trends (both short-term and long-term) repeat themselves.
Traders can use the following technical analysis indicators to predict cryptocurrency price declines:
The Relative Strength Index (RSI) determines whether an asset is oversold or overbought. With this tool, you can predict how much a cryptocurrency asset will change in price.
The Bollinger Bands indicator estimates the relative high and low price of a cryptocurrency asset.
The Average Directional Index (ADX) indicates the strength of the trend.
The annual rate at which the return on investment is determined is called the standard deviation. It provides data on the historical reliability of all bitcoin investments.
Moving averages (MAs), Fibonacci ratios, and extensions are further technical analysis methods that traders can use to identify a downtrend in the market. Although these indications are difficult for the novice trader to understand, understanding them is critical to developing a justification for entering a short sale transaction.
Fundamental Analysis (FA)
It is important to use fundamental analysis to assess trends before selecting trades. Fundamental analysis studies the market dynamics responsible for supply and demand in the cryptocurrency market. Fundamental analysis is based on tracking news, market sentiment, transactional activity, utility, adoption, extrinsic and intrinsic value, and transactions.
Fundamental analysis in cryptocurrencies is different from fundamental research in more traditional markets (forex, stocks). As a result, when studying the basics of crypto, there are three key criteria to examine.
Number of transactions
This measure provides users with information about business activity on the blockchain network. Traders can use moving averages (MAs) and specific periods to determine how crypto assets are performing over time. However, there is no guarantee that these statistics provide precise information, such as the number of people making transactions. Some transactions take place between different wallet addresses belonging to the same person.
Transaction value
Transaction value indicates the value of crypto transactions made during a certain time frame. For example, if fifty people transfer Ethereum in one day, the number of asset transactions will be fifty. If one Ethereum is now worth $2,000, the transaction value of fifty people is $100,000.
On-Chain metrics
The foundations of on-chain are obvious. Merchants can learn more about these statistics by searching for information on the blockchain. It is not difficult to locate it, since certain services and exchanges have provided users with all information about the cryptocurrency on a special blockchain.
Data from BelnCryot in 2021, for example, provides projections of new Bitcoin addresses and the percentage of people profiting. It shows statistics that show individual retailers are not the dominant force in the market. Furthermore, Bybit offers on-chain data charts for a number of cryptocurrencies, which customers can evaluate when trading on the spot.
Pros and Cons of Short Selling Cryptocurrencies
Every action you take in the bitcoin market has pros and cons. Here are the pros and cons of short selling cryptocurrency.
Advantages:
Shorting cryptocurrency has significant earning potential. Profits can be made by shorting a certain crypto asset that is on the slide. If your market research indicates that a certain asset is going to crash, you can short trade it for profit.
Shorting can be a great way to protect your portfolio from the downside risks associated with cryptocurrency markets. When the market falls, short transactions with certain of your portfolio can help you quickly recover the loss of other assets.
Capital requirements for shorting are not excessively high. Many platforms allow users to leverage (multiply equity with borrowed funds) their own funds to make larger bets.
Users can short the bitcoin market in several places. If you're not sure where to start, continue reading to the end for recommended platforms.
Against:
Shorting cryptocurrencies can be a dangerous endeavor, especially if you have no idea what you're doing. When the price of the item you are trading rises, you could lose a significant portion of your trading money. Traders could get caught in market bear traps and short squeezes and lose money.
Investors have difficulty obtaining margin accounts with cryptocurrency exchanges, which are required for some of these markets. Margin interest is also imposed on open short positions.
In general, learn to prepare everything before opening any short position. The key is not to continue to provide liquidity to the market by being a depositor but not a profiteer.
How to get started shorting cryptocurrencies
Here is a detailed step-by-step guide to shorting cryptocurrencies.
Discover the trend
Several factors contribute to the volatility of the bitcoin market. The growth and value of cryptocurrencies can be affected by news developments, sentiments and celebrity hype. For example, Elon Musk, called “The Dogefather”, is responsible for the increase event 2021 through some mysterious statements on Twitter. As a result, find out what the trend is before you short merge.
Open a margin trading account
Most cryptocurrency exchanges allow traders to short sell with leverage. You must open one of these accounts to trade on margin on their platform.
Reduce risk
Due to the huge volatility of the crypto market, even if you follow the appropriate market movements before going into short trades, you can easily lose your deposits and earnings. It is crucial to have risk management methods in place to reduce your risks. To avoid traumatizing the markets, use stop-losses, risk-reward ratios, and profit-taking.
Open a position
Finally, after choosing your entry and exit points for short trades, enter your trade details and start earning your desired profit.
Where to short cryptocurrencies
Binance
Binance allows traders to short pair several cryptocurrencies. Options available include margin trading, futures and options contracts. Choose the one that best meets your trading goals, fill your account and start trading.
Kraken
Kraken is one of the largest cryptocurrency exchanges in the United States. After completing their Know Your Customer (KYC) information, low-cost traders must create a margin account.
Coinbase
This is one of the most famous bitcoin exchanges in the United States. Although margin trading is not available to traders, it is possible to short futures contracts without using leverage.
Other popular shorting exchanges include Bitmex, Bitfinex, Mexc and Bybit.
Ways to short sell cryptocurrency
There are various methods for shorting cryptocurrencies, and exchanges provide some of them to traders on their market. Some allow you to borrow cash, while others require you to go through other channels to short cryptocurrencies.
Contract for Difference (CFD)
A contract for difference is one of the methods of short selling cryptocurrencies without owning them. Instead, traders predict and trade based on price fluctuations of the underlying crypto asset. Unlike previous short trading methods, traders do not need to identify a broker or someone to borrow cryptocurrency from before entering into short transactions.
CFDs allow traders to use leverage to enter short positions. A trader, for example, can use $10 to short a $50 leveraged 5x position. Using high leverage increases the chances of profiting from the transaction difference and making excessive losses if the underlying asset rises.
Margin Trade
Margin trading of the underlying crypto asset requires borrowing funds from an exchange or broker. When the price falls, traders keep the difference after buying high and selling low.
Binary options
Binary options trading allows you to gamble on a deal within a specific time frame. If the cryptocurrency falls as predicted, you will profit.
Futures contract
A futures contract is an agreement between an exchange or broker and a trader to exchange a crypto asset at a certain price in the future. When the cryptocurrency reaches a certain price, the crypto exchange sells it to a trader, who then buys it at a lower price with a profit.
Conclusion
Short-selling bitcoin is a powerful technique that, if executed correctly, can yield infinite profits. For learning, the trend is your best friend. To predict your next short trade, use the technical indicators shown on the charts (which show traders' reactions to market patterns).
