The essence of trading is simple: buy at a lower price, sell at a higher price. This is the most common strategy for making money, but not everyone knows that you can make money on stock trading in other ways. For example, many traders make money by shorting their assets. This article is about what a short is and how to make money on it.
What does short mean?
A short is a position that a trader opens, wishing to profit from a fall in the market, and the trading strategy itself is called “short”.
What is applicable to this trading strategy due to fast expiration. Market participants who open trades of this type are called short-term or “bears”.
Shorters borrow from a broker an asset, the value of which, in their opinion, will decline in the future, and sell it at the maximum current value. When the forecast is fulfilled and the prices on the market go down, the trader will be able to buy the assets back at a lower cost, settle with the broker and fix the profit.
In other words, short is a leveraged short and fast trade. The trading strategy implementation scheme is common for any assets and looks like this:
The investor conducts a fundamental analysis of the market and selects an asset, the value of which should further decrease. The reasons can be different: negative news; problematic situation around the asset or general economic processes.
Then the trader borrows from the broker a certain amount of the asset that suits him. As if he takes an asset on credit, since brokers charge commissions for their services.
The investor places a trade to sell the asset while its value is still at its peak.
All that remains is to wait for the asset price to drop and buy it back, but already much cheaper. After that, the trader settles with the broker, and puts the difference in his pocket.
Short and long
If we consider the dynamics of any stock index, then we can see that in the long term they all show growth. This trend is tracked through the stock market, currency and cryptocurrency markets. This is primarily due to inflation. Any valuable assets (stocks, securities, cryptocurrencies) also rise in price under the influx of inflation, since they are backed by quite real production capacities, copyrights and innovative technologies.
Of course, asset values can go down. As a rule, this is facilitated by economic crises, political unrest or negative news and forecasts. These features of the market have formed two models of behavior among investors, which are implemented through different types of transactions:
long – a trader purchases assets at the time of a decrease in value in the hope of further growth;
short – a market participant acts according to a reverse strategy and waits for the value of assets to decrease in order to redeem them cheaper.
Another important difference is that longs are always opened with their own money. That is, for successful trading, a trader first needs to acquire a certain asset in his own property and keep it in his portfolio until it changes in price. With shorting, a trader can borrow an asset from a broker, make a profit, and then return the loan back.
There are no particular differences in trading short and long positions. The choice in favor of one or another trading method depends only on personal preferences.
5 ways to short
- CFD Brokers
Here, you don’t have to buy cryptocurrencies and sell them again. You open and close your position. The difference will be calculated and if you made a profit, you will be paid, otherwise you will have to pay the difference. However, you still have to make a small initial deposit.
- Cryptocurrency Exchange
There are many cryptocurrency exchanges on the network where you can profitably short cryptocurrency. Attention: due to the volatility of trends in the crypto market, some working functions or tools may cease to exist. Let’s highlight several cryptocurrency exchanges with the best conditions for margin and shorts: Binance, Bitfinex.com, Bitmex.com, Kraken, Huobi, Ledgerx.com.
Futures allow you to buy and sell cryptocurrency on a specific date and at a specific price. These are legal contracts in which you commit to buy a certain number of shares at an agreed price. If the price of the cryptocurrency rises on the specified date according to your forecast, you will make a profit.
- Prediction Markets
Prediction Market is a platform that allows you to place bets on the outcome of future events. If your forecast is correct within a certain range, you will make a profit; otherwise, you will lose the amount wagered. This is a form of betting. Some well-known Prediction Markets: Augur, Stox, Gnosis, Delphi.
- Bitcoin Assets
When shorting with Bitcoin assets, you must wait for the market to recover and increase in value and price. It is not possible to make a profit via direct assets if the price is going down. Shorting Bitcoin assets in a bearish market results in a reduction in losses rather than an actual positive profit. On the other hand, shorting BTC with CFD Brokers may result in positive profit.