Digital currencies are still a nascent market, and many investors have generally not invested because of these assets’ virtual and intangible nature. In many financial markets of the world, short selling is one of the methods used to make more profit. This method can also be used in cryptocurrencies. But how can it be used?
Short sell method
In the stock market, green means profitability. The greener the market, the higher the profit. But is there a way to make a profit again by lowering the price of an asset? If so, what is the procedure? This type of profit is called short selling.
What is a short sell?
Short selling is one of the methods that work in reverse in the market. For example, you sell first and then buy because you do not have enough money to buy first.
Anyone can do short-selling operations in cryptocurrencies. The procedure is simple. First, by looking at the chart, you will notice that the price of a digital currency is falling. You sell it at a higher price, and when the price drops enough, you repurchase it. Simply! Of course, note that if the price rises again after the price drops, you will suffer a loss!
Position difference at short sell time
One of the main ways to make a profit in the cryptocurrency market is to buy when it is cheap and expensive to sell and make a profit. For the gain to be significant, you need to consider when to open or close a position.
Creating a long order means that you are buying crypto, considering that the price will increase after a while. Opening a bitcoin long position means that when the price of bitcoin rises against the dollar, sell it.
Opening a short position is such that you first borrow a digital currency to sell it at the current market price. When the cost of an asset falls, you buy it at a lower price and pay off your debt with a significant price difference. So the price difference makes you profitable.
What is short selling cryptocurrency?
Imagine when you short-sold bitcoin for $ 1,000. Borrow five bitcoins, and now you have $ 5,000. Then you shorten five bitcoins. A few months later, the price of Bitcoin drops to $ 800.
Now you take advantage of this opportunity and pay $ 4,000 to buy bitcoins and then pay off your five bitcoins on loan. In this case, $ 1,000 will remain in your account, but you should keep in mind that you had to borrow five bitcoins to do so.
You can do this for some cryptocurrencies by using smart lending agreements. The difference in price in the market over time allows you to make a good profit this way.
But imagine for a moment that the market went against your expectations and suddenly the price of bitcoin doubled. What will happen to your short-sell strategy then?
Shorting cryptocurrency methods
- Limiting your exposure
- Short-selling method
Limiting your Exposure
Bitcoin is one of the cryptocurrencies associated with many fluctuations, and it isn’t very easy to predict in the short term. But traders like to make a profit where no one else thinks. There are many gains in short-selling, but losses are also very likely.
In this way, the higher the price of a digital currency, the higher your profit. If the price reaches absolute zero, you will get the most profit. So you no longer have to pay anything for your loan, and all your purchases will turn into profit.
In another process, if we assume that you have sold five bitcoins for $ 5,000. Now the price of bitcoin has risen from $ 1,000 to $ 3,000. In that case, you would have to pay off $ 15,000 in debt.
In this case, everyone thinks that close their short position in the fastest possible time to minimize the damage. This is called a squeeze.
Any professional trader can make a profit by using market fluctuations in a fraction of a minute. It only needs to know when to open or close the position.
One of the primary methods for short-selling is CFD trading. In this method, you should look for tradable digital currency pairs. If you are aiming for more profit, you can use the CFD trading method without having cryptocurrency. Smart contracts can be traded this way without transferring specific assets. So the amount of profit you make between opening or closing a trade can be considered your income.
On the other hand, investors have to keep some of their assets as backups in their accounts so that they can repurchase the tokens at a target price. The number of guaranteed purchases consider being 50% of the total initial capital.
Keeping guaranteed assets in the user account makes it possible to make a profit from short-selling bitcoins with a targeted strategy. Even if it is new to the cryptocurrency market, this amount of guarantee can offset the losses caused by extreme fluctuations.
In this section, for CFD trading, you must consider the amount of leverage. The percentage of leverage that is right for you to invest in CFDs should be determined based on the number of assets you are about to borrow.
If you have stored $ 2,000 of bitcoin in a decentralized exchange and your leverage is set to 1: 2, a change in bitcoin price will triple your assets. This means that you can short sell $ 4,000 worth of bitcoins, more than the deposit amount.
Leverage somehow magnifies any change in asset prices in this way. Whether this change is positive or negative, the rate of change in asset prices will be greater. For example, if the price changes to $ 500, your loss is $ 1,000.
Of course, in this method, money changers are more concerned with making a profit for their customers, and if they see that the customer suffers a significant loss, they quickly close his position automatically.
In traditional exchanges, investors can trade with a contract between two parties based on an asset that determines its future price. Futures trading is very profitable in money-related markets.
There are also futures contracts in the cryptocurrency market. If the price of bitcoin predicts to rise from $ 5,000 to $ 7,000, a futures contract can be used to buy a bitcoin for $ 5,000 and sell it for $ 7,000 at the contract’s maturity.
How to short sell bitcoins
After opening a margin account, log in to your Binance account and go to the BTC / USD trading section. Depending on the configuration, you can choose cross margin or isolated Margin, 3 to 10 times the price increase.
Then you have to make the transfer by clicking on the Transfer option and setting the USDT amount.
The next step is to implement auto borrowing. For example, if a bitcoin is 5000 USDT, you can borrow up to 15000 USDT. By clicking on the Margin buy BTC option, three bitcoins will receive 5000 USDT, which has been borrowed for a total of 10000 USDT.
Finally, you can activate the automatic refund system. If the price of Bitcoin reaches 6000USDT, sell the coins, and the borrowed 10000 USDT will be repaid automatically. If prices change otherwise, you will have to adjust the payment method manually.
The difference between the short sell and margin trading
There are differences between Margin and short selling. In the short selling method, you sell cryptocurrencies that you do not have. In the margin system, you borrow money to buy cryptocurrencies. In the short selling method, you do not need to pay that much.
Crypto Exchanges That Allow Shorting
Binance is one of the largest cryptocurrency exchanges that offer trading margins to users. To access it, go to the Binance user dashboard.
bitMEX also allows you to trade margins and is one of the best cryptocurrency exchanges. BitMEX currently enables trading margins on six different cryptocurrencies, the most popular of which is Bitcoin. The registration process for this service is straightforward, and you only need an email address. Also, due to having a 2-factor authentication system, the security of the user account is increased.
Kraken is another reputable cryptocurrency exchange in the United States. This exchange with a simple registration system offers the transaction by margin method with different leverage.
Short selling Cryptocurrencies are one of the most effective ways to make more profit without buying assets. In this way, as we explained, you have to constantly monitor the prices and fluctuations of Bitcoin and other digital currencies to know when to open a position and when to close it. Everything depends on you, so start selling short now.