The main feature of the cryptocurrency market is high volatility. All traders know this and actively buy up coins at a low price, hoping that they can sell them more expensive. However, volatility works in both ways: to increase and decrease prices. Ssometimes you can earn on the fall in the market value of cryptocurrencies no worse than on its growth. Many traders have understood this and are playing short. What is a short game on the cryptocurrency market? How does it differ from other cryptocurrency earnings strategies? We will describe in this article!
A trader buys a cryptocurrency, hoping that over time the price will rise, and he will be able to sell it. For example, trader buys air for $ 200, and then sells for $ 300, earning $ 100 for each coin.
The volatility of top cryptocurrencies is not only high, but also unpredictable. Even experienced traders can not always predict exactly how the asset price will behave tomorrow or in a couple of days. It can grow strongly, and then collapse even more, re-enter the growth phase, fall sharply, and so almost to infinity.
In addition, the fall of the cryptocurrency market is always more dynamic than its growth. It is difficult to be sure that the price of the selected altcoin will jump and coins bought for pennies will bring a fortune. But the fact that the price of cryptocurrency will fall (albeit short term), you can always be sure.
The easiest short-cut game is the so-called averaging. The point is simple: you buy an asset at an increasingly lower price, thereby lowering the average purchase price (hence the “averaging”).
For example, some time ago, the price of Bitcoin reached $ 2,900, and then began to gradually decline. Having caught the phase of deep correction (and that was exactly it), traders bought BTC at successive levels of decrease of $ 2,800, 2,600, 2,400, 2,200, 2,000 dollars.
Consequently, the average purchase price was $ 2,400. After the correction phase, Bitcoin went up again and quickly returned to the starting mark of $ 2,900. Thus, playing for a fall during the correction, each coin could earn 500 (2900-2400) dollars.
The main condition is to see the correction phase, to enter and exit in time with the beginning of the next growth phase. So, ownership of market analytics tools is still necessary.
A beginner may have a logical survey. If the price drops to $ 2,000, why do I need to buy bitcoin at every level of decrease? The answer is no less logical – the trader can not accurately predict to what level the price will fall. For example, after the $ 2,800 mark, it could go up again.
Using the averaging strategy, it is better not to be greedy and buy coins at every level of reduction. If the time to enter the market is chosen correctly, the difference between the average purchase price and the peak price of the asset will still bring profit.
Novice traders often do not understand how short positions differ from long positions in the cryptocurrency market. Many people think that the word “short” means short-term deals, and the word “long” means long-term deals. However, it is not.
Both terms came to trading from the stock market. On the first stock exchanges, the positions on the sale of assets were short-lived — they had to be completed as quickly as possible, before the price fall. Therefore, they were called “short” (translated from English as “short”).
Positions for the purchase set, as a rule, for a long time – so that you can buy assets at the best price. Because of this, the name “long” was fixed to them.
The terms have taken root in the cryptocurrency market. Traders open long positions when they want to buy cryptocurrency, and short positions – when they plan to sell assets. Therefore, the short – it is always about the sale of cryptocurrency.
A trader can open positions for sale for an hour, day or week – it will still be short. However, a shorts can be brief, medium or even long-term. With this sorted out, go to the shortening.
Shorting is a strategy in which the trader opens a position to sell cryptocurrency, hoping for a fall in its market value. That is, as in averaging, it plays for a fall. However, he does not buy coins at lower price levels. Everything is a little more complicated here.
For example, a trader lends 10BTC and sells them at the current rate – conditionally, $ 7,000 per coin. So, he gets $ 70,000 from the sale. After some time, the course drops to 6500 dollars.
The trader buys the same 10BTC to repay the debt, but already pays 65,000 dollars for them. Then he returns his debt to BTC, but because of the difference in the rate at the time of taking and returning the debt, he still has 500 (7000-6500) dollars. This is his profit from shortening.
Many top sites (Bitfinex, Bittrex, Bitstamp, CEX.io, Bitmex and others) offer their users margin trading or trading with leverage.
A trader can borrow a cryptocurrency from another user or from the exchange itself. The lender receives interest for lending his assets and the borrower can use the funds received at his own discretion. When shortening, he buys a cryptocurrency on them, which will fall in price.
He borrowed 10BTC and sold them for $ 7,000 per coin. Suppose he turns the transaction on the stock exchange with a transaction commission of 0.2%. Then he paid about $ 140 in commission for the sale of assets. Then he bought 10BTC at the rate of 6500 dollars. Commission will be about 130 dollars.
After that, he returned the debt to the lender. However, I returned not those 10BTC that I took, but 10BTC + interest on the loan. On most exchanges, the interest rate on margin trading is 2%. That is, he must return 10.2BTC at the new rate. At this point, he loses about $ 1,400 more. Its net profit will be 5000-140-130-1400 = 3300 dollars.
The amount, of course, is not bad. Especially when you consider that under favorable conditions (if the course collapses sharply) all the steps of shortening can take only a few days.
If a trader borrows a cryptocurrency and wants to make money on the fall in its value, he must be sure that it will really fall. However, you can never be sure of something for sure in the cryptocurrency market.
And, most importantly, far from always shorting does not make a profit because of inexperience or incorrect calculations of a trader. Often the projected trend is disturbed due to the activities of other players. For example, a “bullish” trend (when the rate rises sharply) in many cases simply overlaps the “bearish” one (the course rate drops).
In addition, experienced players know when most traders take a short position and use it for their own benefit. For example, they artificially increase the rate, a massively mean cryptocurrency, and then lower it at the right moment, when ordinary traders have already lost money on shortening.
A short game based on the principle of shortening is considered to be a very effective cryptocurrency earnings strategy. At the same time, it is much more risky than investing in long-term or averaging.
According to experienced traders, under favorable conditions, the profit from shortening amounts is from 7 till 10% of the invested amount. In this case, not entirely own investments are used, but mostly borrowed funds. This significantly reduces the degree of the problem of starting investments.
However, the amount of profit depends largely on the amount that the trader has. If he can borrow 10BTC, he has a chance to earn several thousand dollars. If he has only 1BTC at his disposal, he cannot count on a serious profit.
Be that as it may, bitcoin shorts and working with large amounts is only for experienced traders. If they are confident that they will be able to correctly analyze the market dynamics of cryptocurrency and enter the market in a pronounced downward trend only in this case, the difference in rates will allow you to earn on shortening the above 7-10%.
Beginners are not recommended to engage in shortening. They can try shorts of “calm” altcoins with a more predictable course in the extreme case. The shorting scheme for new traders is as follows.
However, for beginners is better to tamp one’s hand at averaging. With the right approach, such a strategy also makes a profit and also helps to understand the functioning of the market and the formation of the price of cryptocurrency. When this level is taken, you can move on to shortening.