Most beginners in crypto trading typically only know how to take long positions. But they are leaving a lot on the table but not knowing and understanding about short positions. Incorporating shorting into your trading strategy can help you to diversify your portfolio and allows you to profit both from uptrending and downtrending markets.
What Is A Long Position In Crypto Trading
A long position is a strategy where a trader buys a cryptocurrency and profits when the price of the cryptocurrency rises. When you take a long position in the crypto market, you believe that the crypto that you buy will rise in the future. A long position allows you to own the crypto so that if prices rise in the future, you can sell it at a higher price and profit from the difference.
For example, if the current price of BTC is $30,000 and you believe that the price of BTC will rise to $40,000 in the future, you can take a long position. If a month later, the price of BTC rises to $40,000, you can sell and close your long position. Your gain would be $10,000 ($40,000 – $30,000).
What Is A Short Position In Crypto Trading
A short position is a strategy where a trader sells a cryptocurrency and profits when the price of the cryptocurrency declines. When you take a short position in the crypto market, you borrow the crypto from a third party such as a cryptocurrency exchange to sell it on the market. If the price of the crypto goes down, you can repurchase the crypto at a lower price and return it to the third party, thereby profiting from the price difference.
Short selling allows you to potentially profit from falling prices and provides an opportunity for you to hedge your existing long positions or speculate on market downturns.
For example, if the current price of ETH is $100,000 and you believe that the price of ETH will fall to $80,000 in the future, you can take a short position. If a month later, the price of ETH declines to $80,000, you can repurchase ETH and close your short position. Your gain would be $20,000 ($100,000 – $80,000).
How Do You Make Money Shorting In Crypto Trading
Most people are familiar with the concept of long positions. You make a profit selling at a higher price than what you bought the crypto for. Because of how short positions work, they may not be as intuitive as long positions but we will do our best to explain it here.
1. Borrowing the crypto: When you take on a short position, you are borrowing crypto from a third party typically from a crypto exchange. So you do not own the crypto which means that you have to return the crypto you borrowed at a later date.
2. Selling the borrowed crypto: After borrowing the crypto, you sell it in the market at the current market price. The proceeds from the sale are credited to your account.
3. Buying back the crypto: If it goes according to your plan and prices fall, you can buy the crypto at a lower price to return the crypto to the third party who loaned it to you. This is known as “covering” or “closing” the short position.
4. Returning the crypto: After buying back the crypto, you return it to the lender. The lender may charge interest for borrowing the crypto, which is usually based on how long you borrowed (short) the crypto.
5. The profit or loss from a short trade is calculated based on the difference between the price at which you sold the crypto and the price at which you bought it back, minus any interest charges.
What Is The Difference Between Long Positions And Short Positions
The primary difference between long and short positions in crypto trading is your outlook on the market. Taking a long position expresses your view that you believe prices will rise in the future. A long position allows you to profit from the upward price movement by selling the crypto at a higher price than your initial purchase price.
On the other hand, taking a short position expresses your view that you believe prices will decline in the future. A short position allows you to profit from the downward price movement by repurchasing the crypto at a lower price than what you initially borrowed for.
Long positions are typically taken during bullish markets, with traders looking to capitalize on upward trends while short positions are typically taken during bearish markets where traders look to profit from falling prices.
Long and short trading can help you better navigate the ups and downs of the crypto markets. Both approaches have their own risks and rewards therefore the key is to understand them and have them fit within your own trading strategy and style.
Disclaimer: This material is for information purposes only and does not constitute financial advice. Flipster makes no recommendations or guarantees in respect of any digital asset, product, or service.
Trading digital assets and digital asset derivatives comes with significant risk of loss due to its high price volatility, and is not suitable for all investors.