Cryptocurrency Short-Selling: Rules and Strategies You Should Know

Cryptocurrency Short-Selling: Rules and Strategies You Should Know image

Tired of the normal trading routine? You might be interested in trying out short-selling.

Since the rise of cryptocurrencies, Bitcoin has been in the hot seat of different trading companies, traders, agencies, and even critiques. After its great boom last December 2017 and its subsequent downfall, it still remained in the top spot of cryptocurrencies.

If you’re interested in cryptocurrency trading, you might want to read this article.

But the truth is:

No one can accurately predict the exact trend of Bitcoin as well as that of other crypto coins.

However, this unpredictability in the trend is what some traders are counting on. With the continuous uptrend, it’s ensured that a downtrend will occur sooner or later. And that’s what short-sell traders are waiting for.

This article will teach you the rules and strategies you should know when it comes to cryptocurrency short-selling. But before that, let’s discuss first what short-selling means.

What is Short-Selling?

By definition, short-selling is a method to earn or make money on an asset’s downtrend or price drop.

In essence, you, the trader, would borrow an asset, which in this case is a cryptocurrency, and directly sell it at its current price. Then, at a later time, you would replace what you borrowed by purchasing a cryptocurrency after its price dropped.

The part where you would be able to make a profit is the difference between the price you got from selling and the moment you purchased a replacement for what you borrowed.

Now, there are different ways to short-sell a cryptocurrency:

  • Bitcoin Exchanges

  • Put Options

  • CFD (Contract for Difference)

These methods work through a trading agency or platform. However, knowing these wouldn’t ensure your profits. That’s why it’s important to know the rules and strategies in short-selling.

Rules and Strategies in Short-Selling

Here are some of the rules and strategies in short-selling you should pay attention to:

Selling into an Active Decline

The difference between stocks trading and cryptocurrency exchanges is the opening and closing time. In reality, there is really no opening and closing time in cryptocurrency exchanges.

However, you’ll notice that the digital assets market both have light and heavy traffic. If you time it right, you would notice that there is a price difference in 24 hours that would resemble a trend.

If you see that there’s a decline in the prices in 24 hours, it’s an active decline. This is a good opportunity to short-sell and profit.

Practice caution. There’s nothing certain with an active decline and the price could suddenly rise up.

Selling a Pullback in a Downtrend

A pullback is a sign that there might be a trend reversal. It’s a brief price movement — the opposite of an uptrend.

If you suddenly see a quick drop during an uptrend, there’s a good chance the uptrend is over. It is true that you might be able to make quick profits during the intermittent drops but think about the long-term, too. If it’s a trend reversal, then you could make more profits than betting on quick drops.

Short-Sell During Bear Markets

If you’re not familiar with bear and bull runs, it’s simply the term used for the market seasons. A bull market is when the prices are rising. The bear market is the bull’s opposite.

Don’t get tempted with betting during bull runs. A lot of traders have tried and regretted painfully. If you do so, you’ll be betting against a great deal.

Bull runs could take a while. However, a bear market will surely come. Wait for it patiently. You’ll have more chances, greater even, in making a profitable trade during a bear market than a bull run.

Wait for the Trend to Go Below Support Levels

Before we go through this strategy, let’s get you acquainted with what a support level is. 

In simple terms, a support level is a price level where an asset’s price seems to stop decreasing further. If the price is able to break through, you can expect a sharp decline.

Watch out for such events. If you see a breakdown, be ready to short-sell. You would likely be able to profit during these moments.

Use a Stop-Loss Order

No matter how hard you try, you won’t be able to predict the exact movements of the market.

A stop-loss order would help you minimize the risks. Most cryptocurrency trading platforms and exchanges have a stop-loss order where you can enter an order to sell your asset at a predetermined price.

In addition, be sure to adjust the price according to price movements on the market.

Watch out for Events That Influence the Market

There are some events that would surely affect the market. Some events that could lower a coin’s price include:

  • Hacking incidents on cryptocurrency exchanges

  • Risky blockchain hard forks

  • Unfavorable regulatory action from major countries

  • Cryptographic breaches on blockchains

  • Large cryptocurrency movements by investors and traders

Final Words

Whatever happens, the best strategy you can do when it comes to short-selling or in any trading is to practice caution. Cryptocurrency trading is still betting on its core. But the strategies and rules above could help increase your odds in the market.

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