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How To Short Crypto And Risks To Consider


The essence of trading is simple: buy cheap and sell dear. This is the most common earning strategy, but not everyone knows that there are other ways to make money in exchange trading. For example, many traders earn by shorting their assets. The following guide from AdroFx will explain what a short position is and how to make money from it.

What Is Short Selling, And How Does It Work In Crypto?

Shorting a cryptocurrency is selling coins in order to buy them back later at a lower price. The interesting part of this strategy is that the trader does not own the cryptocurrency on which they are planning to make money. To understand the concept of shorting, you need to understand what a long and short position in the cryptocurrency market is. A long position is buying a cryptocurrency when its price is expected to rise. For example, you buy an altcoin for $10 and expect its price to rise to $12. And as soon as the price rises, that altcoin is sold at a profit.

And a short position is borrowing and selling a cryptocurrency when its price is expected to fall. Thus, when the price falls, you buy such a cryptocurrency and make a profit from the difference in the selling and buying price.

Here's An Example:

Short selling is taking advantage of a decrease in the price of an asset. This strategy is worth resorting to when the market price of an asset is expected to decline. However, shorting cryptocurrency can be quite risky because the market is unpredictable. There is a chance of both making and losing money due to volatility.

Long positions are less risky – the price of the asset may fall, but not to zero, and you will suffer losses, but the investment will not burn out. But opening a short position may cause the price of the asset to rise indefinitely, and with it your losses. That is why before entering into a short position, you should carefully study the market. If you are sure that the price is sure to fall, then the risk becomes justified.

Why Short Cryptocurrency

Cryptocurrency short selling can have different reasons, depending on how much you plan to earn and how the market has been studied. Here are the most common reasons.

Risks Of Short Selling

While shorting cryptocurrencies is a good way to make money, it also has its risks. Here are the most dangerous of them.

How Can You Short A Cryptocurrency?

Before shorting a cryptocurrency, the first thing to do is to find the right market trend. The cryptocurrency market is very volatile and can change rapidly in any direction due to many factors. For example, cryptocurrencies are influenced by political events, "hype" or mentions by famous personalities.

Before selling, determine the trend of the cryptocurrency and see if it is influenced by a major company or celebrity. Once the trend is determined, you need to create a margin trading account. Most cryptocurrency brokers offer this service. Also, check the regulatory requirements of your country and make sure you won't violate any of them.

So, we've figured out what cryptocurrency shorting is, now let's find out what methods there are for short selling.

Prediction Markets

If you want to learn how to short cryptocurrency while interacting with other investors, then look at prediction markets. These markets are similar to traditional markets. In them, investors predict changes in the price of various cryptocurrencies. And other market participants can "join" your prediction, and if it comes true, you will make a profit.

Tips For Shorting Cryptocurrency

The success of shorting a cryptocurrency depends on several factors, so make sure you choose the right approach before starting such a trade. After all, the last thing you want to encounter is shorting a cryptocurrency during a false correction. Here are a few tips on how to short a cryptocurrency correctly.

Use Technical Analysis

Technical analysis is the use of real data to predict how the crypto market will behave in the future. It examines the past performance of a particular asset. So, if you are planning to short bitcoin, you must first compare the trading volume of BTC for the current day with the volume in the past months. Technical analysis is partly based on Dow's theory, which states that market pricing depends on a number of factors: regulations, current, past, and future demand for the cryptocurrency, and traders' expectations.

The essence of technical analysis is that history is cyclical and trends and prices change according to a steady algorithm. The information obtained through technical analysis is used to predict future changes in the market.

Moreover, technical analysis is based on the idea that any change in the crypto market is not random, but based on trends, both short-term and long-term. So, if an asset follows a trend, that trend will eventually reverse.

Here are some indicators used in technical analysis:

These indicators help determine the potential profitability of a planned investment. You can also use various statistical tools, such as Fibonacci, Time Weighted Average Price (TWAP), Volume Weighted Average Price (VWAP), and Moving Averages (MA). Please note that for shorting bitcoin and any other cryptocurrencies, it is crucial to understand the Moving Averages indicator. In simple words, an MA is the price of a cryptocurrency over a certain period. As a rule, an MA depends on the market price of the asset for the last 20 days. In order to increase the accuracy of forecasting, several MAs are used simultaneously, the data from which is combined.

However, this is a rather complicated statistical concept, which takes some time to study. If you are a beginner and are still just learning how to short cryptocurrencies, you probably try to avoid such complicated economic topics. We highly recommend that you thoroughly study all of the indicators presented, despite their complexity, as they help to significantly improve your investment performance.

Follow The News

That's right - news from any sector, be it the cryptocurrency sector or the economic-political arena, can have the strongest impact on the market. Government "crackdowns" and regulations can lead to severe declines in the crypto market. If you expect changes in the world to affect the market soon, you can benefit from this situation. However, make sure that you do not violate any regulatory requirements, as this could get you into serious trouble.

Short A Cryptocurrency In A Rising Market

Is it okay to short cryptocurrency during unexpected market rallies? Absolutely. This is the best time to short-sell any cryptocurrency. During such rallies, assets get overbought due to the prevailing fear of missing out syndrome (FOMO) in the market. But when the hype subsides, the asset returns to its original value or even falls, creating an opportunity for short traders to make money.

Conclusion

Selling cryptocurrency can bring a trader quite a high income even against the backdrop of a general market decline. If you trade on the exchange but do not use short strategies - it is not a full-fledged trade. Market participants should be able to make money under any circumstances and trends, and to do that, they need to be able to play both up and down.

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