Navigating the crypto market can often feel like traversing through a dense fog of uncertainty, with potential investments shrouded in volatility and significant risks. Amidst this complexity, the long/short trading strategy manages to thrive as a beacon of safety and adaptability in the highly volatile crypto market scape.
The key selling feature of this approach is its ability to capitalize on bullish and bearish market scenarios. And as a result, it is popular among cryptocurrency traders looking for a more secure and flexible investment strategy that can withstand market fluctuations. This piece will explore the fundamentals of the long/short trading strategy, what it entails, and, more importantly, how to short and long your crypto assets.
Related: History Of Blockchain
What is Long/Short In Crypto Trading?
The short and long trading strategies involve speculating on the price movements of cryptocurrencies. But they differ significantly in their underlying methods and outcomes.
Short trading
Short trading, also known as short-selling or going short, is a technique traders use to profit from a decline in the price of a cryptocurrency. Traders start by borrowing a certain amount of cryptocurrency from a broker or exchange, which they immediately sell on the market. The goal is to wait for the price to drop, allowing you to buy back the cryptocurrency at a lower price. You can then repay the borrowed amount and pocket the remaining profit. Essentially, shorting involves betting that the cryptocurrency’s value will decrease over time. If the price drops as anticipated, you’ll benefit from the difference between the selling and lower buying prices. Conversely, if the price increases instead, you’re liable to suffer a loss.
Shorting crypto example
Let’s say you borrow one Bitcoin from your broker and short-sell it for $25,000. After some time, the price of Bitcoin falls to $20,000, just as you thought it would. Now, you buy back the Bitcoin for $20,000, not the $25,000 you initially sold it for.
In simple terms, you borrowed one Bitcoin and sold it for $25,000. When the price dropped to $20,000, as you expected, you repurchased it for that lower price and returned it. This way, you made a profit of $5,000 because you sold it for a higher price and repurchased it for a lower price.
Long trading
Long trading, also called going long, is the opposite of shorting. Investors use this strategy to capitalize on a cryptocurrency’s potential price appreciation over time. Traders initiate a position by purchasing and holding a particular amount of cryptocurrencies, hoping their value will rise. The thought process behind going long is to bet on the cryptocurrency’s price rising(long or short term) to sell later at a higher price and profit.
When the price increases as anticipated, you benefit from the difference between the buying and the higher selling prices, resulting in a profit. However, if the price goes down instead, you’ll be looking at potential losses. One significant advantage of longing is the unlimited profit potential as a cryptocurrency’s price can potentially experience sustained long-term growth.
Nevertheless, the risk is limited to the initial cryptocurrency investment. In other words, your losses are confined to the amount initially invested, providing some level of protection in case of price downturns.
Related: Best AI Crypto Projects to Buy
Long Trading vs. Short Trading in Crypto
Understanding the key distinctions between shorting and longing is crucial for any trader looking to navigate the crypto market effectively.
| Definition | Betting on a price decrease | Betting on a price increase |
| Strategy | Borrowing and selling a cryptocurrency | Buying and holding a cryptocurrency |
| Market Direction | Profits in bearish (down) markets | Profits in bullish (up) markets |
| Profit Potential | Capped profit potential (price can’t go below zero) | Unlimited profit potential (price can rise significantly) |
| Risk | Unlimited risk (price can rise indefinitely) | Limited risk (limited to the initial investment) |
| Trade Execution | Sell first, then buy later at a lower price | Buy first, then sell later at a higher price |
| Timeframe | Short-term trading (typically days or weeks) | Long-term investment (months or years) |
| Market Sentiment | Pessimistic view on the cryptocurrency’s performance | Optimistic view on the cryptocurrency’s performance |
| Common Scenario | Expecting a cryptocurrency’s price to drop due to negative news or market conditions | Expecting a cryptocurrency’s price to increase due to positive news or market conditions |
| Risk Management | Stop-loss orders used to limit potential losses | Take-profit orders used to secure profits |
| Popularity | Popular during market downturns or corrections | Popular during market upswings or bullish trends |
| Suitability | Suitable for experienced traders who can manage high risks | Suitable for investors looking for long-term growth and steady returns |
Keep in mind that while shorting and longing are distinct trading strategies, they can complement each other in a trader’s portfolio. By diversifying your approach, you can better navigate the cryptocurrency market’s volatility and adapt to various market conditions.
Related: Cryptocurrency scams to watch out for
How to Short Crypto
Let’s quickly review how you can short crypto assets. Here’s a step-by-step guide on how to short crypto:
Step#1: Educate yourself
Understand the concept of shorting and the risks involved. Learn about the cryptocurrency market, how it operates, and the factors that influence price movements.
Step#2: Choose a reputable exchange
Select a cryptocurrency exchange that allows shorting. Not all exchanges support this trading strategy, so ensure you choose one that does. Some popular exchanges that offer shorting options include Bitfinex, Kraken, and BitMEX. Keep in mind that availability may vary depending on the current landscape and regulations.
Step#3: Create an account
Register and create an account on the chosen exchange. Complete any required verification procedures as per the exchange’s guidelines.
Step#4: Deposit funds
Deposit the necessary funds into your exchange account. The amount you deposit will determine the maximum value of the position you can take. Keep in mind that shorting may require additional margin or collateral, depending on the exchange’s rules.
Step#5: Select the cryptocurrency
Choose the cryptocurrency you want to short. Focus on coins or tokens that you believe will experience a price decline based on your research and analysis.
Step#6: Open a short position
Once you have deposited funds and selected the cryptocurrency, it’s time to open a short position. The actual process may vary slightly depending on the exchange. But generally, you’ll find a “short” or “sell” button associated with the chosen cryptocurrency.
Step#7: Choose position size
Decide on the size of your short position. Be mindful of your risk tolerance, and consider using only a small percentage of your total trading capital for shorting.
Step#8: Set Stop-Loss and Take-Profit
Implement risk management strategies by setting stop-loss and take-profit orders. The stop-loss order will help limit potential losses if the price goes against your short position, while the take-profit order will secure your profits if the price reaches your desired target.
Step#9: Monitor your position
Keep a close eye on your short position and the overall market conditions. Cryptocurrency markets can be highly volatile, so it’s essential to stay vigilant and be prepared to adjust your strategy if or when necessary.
Step#10: Closing the position
To close your short position, you’ll need to buy back the same amount of the cryptocurrency that you originally sold short. If the price has indeed dropped since you opened the position, you’ll profit from the difference. However, if the price has risen, you’ll incur a loss.
Step#11: Review and learn
After closing the position, take the time to review your trade. Analyze what worked well and what didn’t. The road to becoming a pro trader is long and windy. Learning from your experiences will help you improve your short trading skills for future trades.
N.B
It’s worth mentioning that shorting crypto can be highly risky. It involves betting against the overall upward trend of the cryptocurrency market. If you’re new to trading or unsure of your abilities, starting with less risky strategies may be prudent before delving into shorting.
Related: Best cryptocurrencies to invest in 2023
How to Long Crypto
Let’s quickly review how you can long crypto assets. Here’s a step-by-step guide on how long crypto:
Step#1: Choose a reputable exchange
Select a cryptocurrency exchange that offers a wide range of cryptocurrencies and has a good reputation for security and reliability.
Step#2: Create an Account
Register and create an account on the chosen exchange. Complete any required verification procedures as per the exchange’s guidelines.
Step#3: Deposit funds
Deposit the desired amount of funds into your exchange account. This will be the capital you use to purchase the cryptocurrency.
Step#4: Research and select cryptocurrencies
Conduct thorough research on various cryptocurrencies. Look for projects with strong fundamentals, active development teams, real-world use cases, and positive community sentiment. Based on your research, select the cryptocurrencies you believe have the potential for long-term growth.
Step#5: Choose a Wallet
Decide on a secure cryptocurrency wallet to store your purchased coins. There are many options to choose from. But hardware wallets, such as Ledger or Trezor, generally offer the most foolproof security for long-term holdings.
Step#6: Buy the cryptocurrency
Find the cryptocurrency you want to invest in on the exchange and place a buy order. Enter the amount of the cryptocurrency you wish to purchase and execute the trade.
Step#7: Set long-term goals
Determine your long-term investment goals and the time horizon you are willing to hold the cryptocurrency. Long-term investing typically involves holding assets for months or even years.
Step#8: Practice risk management
Avoid investing more than you can afford to lose. Cryptocurrency markets can be highly volatile, so managing risk by diversifying your investments and not putting all your capital into a single cryptocurrency is essential.
Step#9: Monitor market conditions
While long-term investing doesn’t require constant monitoring like short-term trading, staying informed about the market and any significant developments that could impact your investment cryptos is still important.
Step#10: Review and adjust
Regularly review your investment strategy and portfolio performance. Be prepared to adjust your holdings based on changes in market conditions or if new information emerges about your crypto assets.
Step#11: Stick to your plan
Long-term investing requires discipline and patience. Avoid making impulsive decisions based on short-term market fluctuations. Stick to your investment plan and remain focused on your long-term goals. That said, to minimize the impact of market volatility, consider a dollar-cost averaging approach. It involves investing a fixed amount of your capital at regular intervals, regardless of the cryptocurrency’s current price. This strategy can help mitigate the effects of short-term price fluctuations.
N.B
Keep in mind that long-term investing is a more conservative approach than active trading, and it requires a different mindset. Like any investment, risks are involved, and past performance does not indicate future results. However, long-term investing can be a rewarding strategy for those willing to hold through market fluctuations and believe in the long-term potential of their investment vehicles.
Frequently Asked Questions on How to Short and Long Crypto
Yes. Engaging in long and short positions on a crypto asset simultaneously allows you to profit regardless of whether the price goes up or down. This sophisticated strategy is known as ‘hedging’ and mitigates the risks associated with price volatility. By employing hedging, you can hold a long position to benefit from potential price increases while also having a short position to capitalize on potential price decreases.
Practically, there is no specific time restriction for holding a short position. As long as you have enough funds to meet the margin requirements your broker or exchange sets, you can maintain the short position for an extended period. However, it’s essential to be mindful of the associated risks and costs of maintaining such positions over a prolonged duration.
Deciding whether to go long or short on trade depends on the specific asset you are considering. If you have confidence that your chosen token will increase, you can buy it and hold onto it for potential gains. On the other hand, if the asset appears to have an overvalued position in the market, consider shorting it, anticipating a price decrease to profit from the trade.
Conclusion: How to Short and Long Crypto
In the face of it, shorting and longing crypto present distinct opportunities and risks in the dynamic world of crypto trading. Shorting offers the potential for substantial gains for those seeking quick returns but demands a keen understanding of market dynamics and adept risk management.
Conversely, long-term investors may find comfort in the steadier growth and potential of long positions, requiring a patient approach and a belief in the prospects of selected investment vehicles. To mitigate risks effectively, both strategies must be approached with caution and extensive research, regardless of your preference.
