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What Is Shorting?
Shorting is a trading term that means selling cryptocurrency when the price of the asset is going to decline in value and re-buying it at a lower price at a later stage.
Crypto traders enter a short position when they believe that the crypto asset is decreasing its value, in this situation, they adopt a short-selling strategy to preserve their capital during price declines (What Is Shorting in the Financial Markets?, 2021).
Shorting allows the investors to profit off the asset’s price decline.
The opposite of a short position is a long position. In a log position, crypto traders buy the cryptocurrency with an expectation that the price of the asset will increase and selling it later at a higher price.
This is to remember that when the market showing bearish signals, the short positions exceed the long positions, this is an observation, not a rule to follow. Besides this, the shorting concept does not have any concern with the short-term investment rule.
How to Short Cryptocurrency?
Shorting is commonly done with the borrowed money. Therefore, it is closely related to Margin trading. With Margin trading (Traders can make trades using borrowed funds from other traders or exchange platforms) traders can magnify the potential profits of short positions by several times.
Let’s explain shorting cryptocurrency with an example:
You put the required collateral and borrow 1 bitcoin & immediately short-sell the Bitcoin when the price of 1 Bitcoin is $50,000. You believe that the price of Bitcoin is going to rise. when the market goes down to $48,000, you buy 1 Bitcoin at the price of $48,000 & return borrowed funds to the lender by paying interest amounts and fees. In this case, your profit would be $2000 minus the interest payments and fees.
You can open short positions on any crypto exchange that provides margin trading or spot exchange such as Bingbon spot trading exchange for buying and selling assets or exchanges that offer futures, options, or other derivatives trading services.
Pros of Shorting Cryptocurrency
- Shorting cryptocurrency or altcoins lets you profit off asset price declines without holding the asset for a long time, manage risks, and hedging the existing holdings against price volatility.
- Short selling helps investors to generate countless profits in a short period of time.
- Crypto traders prefer margin trading that involves trading with leverage to magnify the potential profits of short positions.
Cons of Shorting Cryptocurrency
- Short selling is a highly risky way that may lead to unlimited losses if you don’t make an instant decision when the prediction goes wrong (Sykes, 2021).
- Traders need to pay interest payments and fees of exchanges platform that reduces your profit gains of shorting.
- Margin interest incurs.
What Is the Difference between Shorting Regular Stock & Shorting Cryptocurrency?
Shorting regular stock occurs when a trader borrows shares of stock or other assets from regular trading platforms expecting that a stock or security’s price will decrease & sells it in an open market intending to buy back it later at a lower price to make a profit. The borrowed money will be returned to the lender or broker at the regular trading platforms. The broker charges interest payments or commissions charged on trades (HAYES, 2021).
However, Crypto traders enter the short-selling position by borrowing Bitcoin or altcoins from other traders or cryptocurrency exchanges & selling the cryptocurrency believing that the price of the asset will decline & buying again at a lower price to make a profit. The borrowed funds return to the lenders who are other crypto traders or cryptocurrency trading exchanges. The interest payments will be charged by traders and trading fees to be paid to exchanges.
We found the following three significant differences between shorting the stock and shorting cryptocurrency:
- In shorting the regular stock, the trader borrows shares of stock or other assets from regular trading platforms. Contrary to this, crypto traders borrow Bitcoin or altcoins from other traders or crypto exchanges.
- The process of borrowing shares of stock and returning them is handled by the broker/ dealer in shorting regular stocks. Conversely, crypto traders execute short-selling themselves.
- Interest payments are charged by brokers or commissions charged on trades in shorting regular stock while crypto lenders charge interest payments and trading fees on trades in shorting cryptocurrency.
Crypto traders enter in a short-selling position when they believe that the cryptocurrency price will decline in value, he/she borrows money from other traders or cryptocurrency trading platform, sell the asset and buy it later at a lower price. Shorting selling accompanied by high risk and reward therefore traders need to take careful trading strategy to generate income & avoid risks of shorting.
What Is Shorting in the Financial Markets? (2021, 05 27). Retrieved from Binance: https://academy.binance.com/en/articles/what-is-shorting-in-the-financial-markets
HAYES, A. (2021, 3 13). Short Selling. Retrieved from Investopedia: https://www.investopedia.com/terms/s/shortselling.asp
Sykes, T. (2021, 6 8). How to Short a Stock on TD Ameritrade as an Example (7 Steps). Retrieved from Tim othe Sykes: https://www.timothysykes.com/blog/how-to-short-sell-stocks/