Cryptocurrencies are not alien to price volatility, which remains a curse and a blessing to the blooming space. Prices of digital assets continue to remain unstable for a period as fluctuations hit them hard. Sometimes, this is good for investors, especially those who bought the assets cheaply and can now sell them for profit. Alternatively, it is devasting for investors who buy at a higher price and will sell cheaply at a considerable loss in the crypto market. The unfortunate event with price volatility is when asset prices fall rapidly within a short time (like a day).
Fortunately, price volatility can sometimes enter the correction phase faster, and if investors wait, they can earn profits. Unfortunately, price volatility remains a huge topic in the crypto market, as it remains pertinent to its growth. Factors like supply & demand, market information, and seasonality are among the most significant price volatility influencers. Alternatively, short selling is a concept one can use to leverage high price volatility. This allows investors to make money when prices are falling in the crypto market, even without owning crypto.
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Why Is The Crypto Market Down?
Bitcoin, Ethereum, and many leading assets have been down in the last week, as it looks like a bearish run looms. However, while investors are not panicking, crypto analysts predict that a crash might be imminent. Surprisingly, the volatile nature of digital assets is why predictions concerning its future can’t be mere speculations. Hence, it is why, no matter what analyst predicts, their future might take a different turn. Crypto analysts believe the war in Ukraine could be why the prices of digital assets are falling. Alternatively, there are also rumors of investors dumping their assets, as they are losing patience with its growth. This scenario is common with altcoins, which have been relatively slow in growth this year.
According to statistics from fool.com, consumer sentiments in the crypto market towards cryptocurrencies are at an all-time low. The crypto analytics survey shows that, despite investors committing funds to cryptocurrencies, their belief in its future is weak. There are also reports that North American investors are pulling their money out of the market at an alarming pace. This is why the digital asset trading flows have moved toward the negative in the last few weeks. Another reason behind a negative trading flow is that investors hedge risks by dumping assets like Bitcoin for low-cap cryptocurrencies. If this trend continues, prices will fall further, and market capitalization will collapse. However, the hope is that this trend will discontinue, and a market correction looms.
What Is Short Selling?
Short selling is a trading strategy that investors use to hedge against losses. Alternatively, traders also use the positions as speculation about future asset prices. It occurs when an investor borrows security to sell on the open market at a high price. Furthermore, the investor also plans to repurchase it cheaper in the future. It involves traders and investors selling off an asset at a higher price and repurchasing it for a lower price. It is an investment or trading strategy that speculates on the decline of an asset like cryptocurrency or stock’s price.
For a short-selling position to open, an investor borrows asset shares they believe their price will reduce in the future. The investor proceeds to sell these borrowed shares to buyers at the current price. However, before investors return the borrowed assets, their price must be lower than the present or decline. This will enable them to buy it back cheaply, for profit. Due to its risks, it is mainly executed by experts, as novices cannot predict market dynamics. For traders, they see short selling as speculation with a possibility of substantial risks. Alternatively, investors have a quicker approach to profits and see short selling as a hedge against future threats. The risk of loss on a short sale is limitless since asset prices have enormous potential to go both ways.
Shorting cryptocurrencies involves crypto traders opening a shorting position on a margin trading platform. It involves an investor borrowing a cryptocurrency like Bitcoin and selling it on an exchange at the current price. The investor then proceeds to repurchase it later at a lower price and returns the capital. However, the profit realized from this activity only comes when the buy-back price is lower than the original selling price. Unfortunately, unlike stocks, cryptocurrencies are highly volatile, with a high risk of loss. A typical example is when a trader borrows Bitcoin priced at $45,000 from a platform and sells it to a buyer. However, at a later period, BItcoin falls to $35,000, and the traders buy it back. This trader returns the asset to the broker and keeps the $15,000 profit realized.
To short cryptocurrencies, investors can go through a margin trading platform, which can help them assess brokers. Brokers can lend them capital to purchase the initial assets and sometimes demand little interest. Alternatively, investors can also use the futures contracts on the margin trading platform. These future contracts allow investors agree to sell or buy an asset for a set price on a fixed date. Bybit, Binance, Kraken, OKEx, and Bitfinex are a few platforms one can short sell cryptocurrencies.
Why Should I Short Sell Crypto
It is important to note that shorting cryptocurrencies is not like pump-and-dump schemes that are manipulative and fraudulent. Pump-and-dump involves a group of investors fraudulently increasing the price of an asset to sell it higher. In short selling, it is basically predictive and highly analytical. However, despite the risks involved, it has high-profit potential. Short-selling is like a gamble and could deliver one into paradise or the trenches. With good predictive analysis, investors could end up in huge fortunes if the events turn out positive. Also, short selling is a low-capital investment, as the broker mainly funds it. Investors have a huge potential to earn massive returns with little or zero capital investments. Short selling could also help investors avoid losses, especially traders with an extensive portfolio. If they own the assets, they are already prone to losses. However, their market analysis skills could avert potential losses by shorting assets.
Limitations Of Short Selling Cryptocurrencies
Why shorting cryptocurrencies can be rewarding, it comes with its demerits. One of the disadvantages of this strategy is that it could lead investors and traders to huge losses. The high–risk nature of the strategy means it is prone to huge losses for investors. If the original selling price remains the asset’s lowest price, investors can run into unlimited losses. Since shorting mainly involves a short time, investors may never recover from the loss incurred. Alternatively, if investors decide to wait longer on assets, they may be paying more interest on the initially borrowed assets.
Unfortunately, investors can also get caught in a short squeeze loop if the crypto asset price skyrockets. Also, Shorting requires a high level of expertise, and novice investors can not participate in it. This is because the technicalities involved in the trading strategy are top-notch and will not favor regular investors. Investors might also rely on luck to scale the market might be a demerit of short selling. The implication of this is that one could predict and analyze efficiently. However, the result could still depend on other external factors like internal market manipulation or luck, beyond the trader’s control.
How To Start Short Selling Cryptocurrencies
Short selling is a risky yet profitable strategy if deployed efficiently. Following the steps below, one can utilize the procedure correctly and earn rewards.
Finding the right asset
This is the most crucial step in shorting and remains critical to investors’ and traders’ journey into shorting. The crypto market currently possesses more than ten thousand different assets, and it is vital to pick the perfect one. A host of factors ranging from value, development, and long-term analysis should be the determinants in choosing an asset. One is close to earning with the perfect asset, even without owning a crypto asset.
Open a margin trading account
Top exchanges globally offer short selling capabilities with leverages. Exchanges like Bybit, Binance, Coinbase, eToro, and Kraken provide exceptional services when it comes to shorting. It is also important to note the territory the exchange you choose covers to avoid regulators’ issues.
Minimize risks with the right strategy
It is important to minimize risks, as the crypto market is volatile, and losses on short positions can grow exponentially. To limit risk exposure, one can stop losses and take profit levels in your trading platform. Many brokers also offer valuable crypto shorting calculators and strategies to hedge risks. Using technical analysis of an asset can also help predict its future movement. Indicators like the Average directional index (ADX), Bollinger Bands, and Relative Strength Index (RSI) are good metrics to leverage upon. Like mainstream conventional markets, prediction markets are a good place for investors to interact concerning shorting assets. Apart from meeting like-minded individuals, one could also earn rewards on internal betting amongst peers.
After everything, investors can begin their shorting experience. At this stage, making the right decision is crucial and critical. It will also determine whether one ends up with a gain or loss.
How To Short Sell On ByBit
Launched in March 2018 and with about three million users, Bybit is a crypto exchange that focuses on derivatives trading. Listed below are steps to short sell on the Bybit exchange.
Signing up on Bybit is easy for new users. You will have to download the Bybit mobile app or use the exchange’s website. The Bybit app is available on Android and iOS stores. Alternatively, new users can signup via its website, www.bybit.com.
The signing up process requires users to supply KYC details like addresses, email addresses, names, etc. You will also need to verify the information you provided. It is worth noting that only verified accounts will have access to the Bybit spot trading platform.
After completing the signing-up process, you can use the new account to buy, sell, and trade cryptocurrencies. Alternatively, users can also use it to hold short or long positions. Lastly, to ensure a smooth trading experience, users can also connect an external wallet to their accounts.
Apart from being a spot and derivatives exchange, Bybit also equips users with a wide range of advanced trading tools to help them. The platform also allows users to either short selling or long selling positions. To enter long positions, traders borrow funds from the exchange to buy crypto assets at a higher price. The trader returns the borrowed funds to the exchange after selling the coins and, thus, keeps the profit. Going for short positions involves traders borrowing assets from the exchange and selling it higher. The trader then repurchases it for a lower price to pocket the profit realized. Traders select ‘Derivatives’ on Bybit’s homepage to enter a short position. It opens up options to choose the type of contract you want to trade. Amongst the options, the ‘Short/sell’ icon will allow traders to short assets they wish on the platform.
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