If there is one universal trading strategy that all trading experts stress on for all kinds of trading markets- it is, buy when prices are low and sell when prices are high. The same strategy applies to the crypto trading market as well. In fact, some traders even opt for long margin trading to make the most of the mentioned strategy. In this case, they borrow funds to buy a sizable amount of crypto when the price is low so that they can earn high-volume profits by selling them when the price surges. There are crypto exchanges with leverage that provide fund support in long leverage trading. But, there is another way to enjoy high profits with leverage trading that follows a completely opposite strategy. It is officially known as Shorting aka Short Selling. Read more about crypto short trading at Multibank.io.
While most of traders desire to trade in a bullish market, shorting traders trade when an asset is approaching a dip or has already tanked.
Here goes a brief on how the shorting strategy in crypto works.
Overview of Shorting
As discussed above, the common practice in cryptocurrency trading or any type of trading is to purchase assets when prices plummet and sell them when the prices move upward. It’s just the opposite with shorting with crypto exchanges with leverage.
In shorting crypto with crypto exchanges with leverage, the trader will sell the assets when the price is high and purchase when the price is low. A shorting trader proceeds with the approach that the price of the chosen asset will tank. He might think that the chosen asset might not have a sustainable future as it is unable to provide a real user-case. Otherwise, the trader might be guided by a prediction that a particular coin is expected to witness a sharp decline in value in the coming months.
Leverage in shorting
How does leverage fit in between? Well, it’s because like regular margin trading (long), shorting also depends on funds borrowed from crypto exchanges with leverage.
So, what happens is that the shorting investor first borrows or lends funds from crypto exchanges with leverage. The idea is to lend crypto to sell the asset at the latest market price. After that, the investor waits till the coin price takes a dip. As soon as the price plummets, the investor purchases the same crypto paying a lower price. The money saved (due to lower buying price) helps him to repay the borrowed sum as well as make profit from the difference.
Let’s explain the situation with an example-
Let’s say Bitcoin is currently priced at $1,000 (1 BTC). You want to lend 5 BTC which means you will have $5,000 with leverage from crypto exchanges with leverage. You are guided by this prediction that the BTC price would plummet to a heavy low in near future. Now, if the coin price actually sinks, say down to $800- you can purchase BTC with $4,000. In that case, you will not only be able to repay the borrowed amount to crypto exchanges with leverage but will also be able to attain a solid profit worth $1,000.
Always remember, in short, the more the prices fall, the better for you. You will be able to make the highest profit if the price sinks down to zero.
However, you will incur a huge loss if your prediction about price drop fails and the coin surprises with a solid upward swing.
Benefits of shorting crypto
Good for short-lived coins
The crypto market is flooded with a vast range of coins but not all of them are going to sustain in the long-term. Some of them are purely built on hype and they won’t be able to stand the test of time. They might show a surge initially but would plummet in value and price shortly. If you spend some time in the market, you will have a basic idea about which coins are about to sink in the near future. You can capitalize on these coins to make profit with shorting.
Good for bearish market
Every cryptocurrency, including the highest-ranking cryptos, go through bearish phases at certain points of time. For example, Bitcoin has shown to enter a bear market a few months after hitting the ATH. This is one place where shorting will help you to make profits even from a bearish market.
Helps hedge risk of large portfolio
If you have opened a traditional long trading position, it would be smarter to open a shorting position as well with crypto exchanges with leverage. As shorting helps to make profit from even a bearish market, the strategy will help to reduce loss in long positions if the coin tanks.
Helps to combat volatility
This point is in connection with the point mentioned above. Crypto market is extremely volatile and goes up and down in the blink of an eye. Now, if you only go for the traditional long position- where you buy in low and sell in high, you might experience a catastrophic loss if the crypto market enters a bearish state. But if you open a shorting position alongside, you will be able to combat volatility risks even when your chosen asset enters a recovery or bearish phase.
Factors to keep in mind with crypto shorting
As crypto shorting is executed with crypto exchanges with leverage, there are certain things to keep in mind. One is, you will have to repay the borrowed amount. The other one is, you will have to maintain a specific amount of sum or margin in your shorting leverage trading account to keep your trading position open. If you incur loss and are unable to maintain that specific margin amount, the exchange will be forced to close your trading position. However, before closing, the exchange will send a notification or margin call to you, notifying you to add more funds to keep the trading account afloat.
Sometimes, it might be a herculean task to maintain a margin account long-term, especially if you have faced losses in succession. Thus, it’s better to keep the leverage range small so that it’s manageable for you to maintain the margin even if you experience loss.
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