When trading on virtual currency exchanges, bidders make money on cryptocurrencies by implementing various strategies. Some prefer bearish trading tactics, opening down positions with cryptocurrency pairs. Others like transactions where growth of quotations is expected and, accordingly, profit from the predicted rise in crypto-asset price. Let’s study why shorting cryptocurrencies is more dangerous than long trades on digital coin exchanges. Let’s take a closer look at the differences in strategies with short and long positions in crypto trading. In cryptocurrency trading, where volatility often spikes, this particular trading methodology will be of interest to all players.
Longing and shorting – what are they?
Everybody knows the traditional formula of successful transactions “to buy cheaper and sell dearer, receiving profit”. It is relevant practically everywhere where trading and exchange transactions are made. Naturally, the cryptocurrency market, Forex and stock exchanges necessarily belong here, because bidders wish to profit from speculative manipulations of financial instruments. This task is implemented by different methods, which involve playing on the rise (long deals) or work on the decline (short orders). These variants of traders’ strategic behavior have their own features.
The term shorting on cryptocurrency exchanges, as well as on Forex, refers to a type of financial operation where the trader sells a crypto asset in order to buy it back later at a lower price. The difference will be direct income.
The concept of longing is an absolutely opposite mechanism of transaction, where a speculator acquires a cryptocurrency pair to wait for the value of the underlying element to rise. This is the embodiment of the traditional scheme of market relations – to take cheap and sell dearer. Also, the income here is calculated as the difference between the final price and the initial price.
The essence of shorting on cryptocurrencies
The trading strategy that involves shorting is aimed at extracting profits when the price of the underlying asset in the cryptocurrency pair falls. In these short positions (selling without coverage), cryptocurrencies received from the virtual currency exchange on loan against a collateral amount are sold. Then, when the drop in quotation reaches the level planned by the trader, the transaction is closed, the underlying asset is repurchased and the cryptocurrency exchange returns the pledged money. If the speculator is trading cryptocurrencies competently on the trend, the downturn in the coin market will turn out to be a profit. Profit = opening price – closing price. You have to subtract the exchange fee from the profit.