Short Bitcoin On Bitfinex
Every novice crypto trader must know how to short Bitcoin (open a short position and make a profit). Popular strategies are BTD and HODL, but shorting is undeservedly deprived of attention in the trader community. In this article, we will discuss about the basic principles of shorting and earning in a bear market using the example of the Bitfinex exchange. Shorting is a more complicated process than a bull market, in which you just need to buy bitcoins and wait for the rate to rise in order to sell profitably.
What is a short?
A short (short position) is the sale of an asset that we do not have in order to buy it in the future at a lower price. The peculiarity of this type of transactions lies in the fact that we will have to borrow a falling asset. After that, we can sell it.
For the first time traders started to open short positions in the stock market. They came up with the idea that stocks that are falling in price can be borrowed and sold, and then repurchased at lower prices. On the cryptocurrency exchange, the principle of operation is approximately the same. The only difference is that there are no brokers on cryptocurrency exchanges. Therefore, only the site itself can lend. The scheme of work will look like this:
We analyze the market and find coins that should fall in price.
– We borrow them from the stock exchange and sell them immediately.
– When the price falls, we buy back the sold coins and return the loan to the exchange. We leave the difference between the amount of sale and purchase – this is our profit.
What exchanges can you short cryptocurrency on?
If trading for a rise (long) is a classic type of transactions and is available on any exchange, then shorting cryptocurrency is not possible everywhere.
As we`ve mentioned above, in order to open a short position, you need to borrow a cryptocurrency from an exchange. And for this you need to look for sites that support margin trading. On most cryptocurrency exchanges, traders have this option.
Margin trading on the Bitfinex exchange
Let’s take a look at the functionality of the exchange. To start trading, your funds must be in the Margin Wallet. For example, you want to short 1 BTC at 35,000 USD on Bitfinex. Choose margin trading (Margin tab, not Exchange!). Set the data and click Margin Sell. When you decide to close an open position, for example at 33,000 USD, you can either use the “Close” button (Market Margin Buy Order to close a short position), or place an opposite order of the same size as the open position. When your order is fully filled, the position will be closed, the funds received will be returned and the profit / loss will be recorded in your margin wallet balance.
In this example, your earnings will be: $ 35,000 – $ 33,000. That is, $ 2,000 for one MTC. If your balance allows you to take, say, 10 BTC, then you will earn $ 20,000 on the market fall.
An important point. The Bitfinex exchange allows you to use leverage up to 3.3x. At the same time, if you use a leverage, the system immediately blocks 15% of the order amount for your current order. The exchange calculates the liquidation price based on its data and automatically displays it when placing an order.
We highly recommend placing stop orders on the Bitfinex exchange, since the exchange has high liquidity and there is a possibility of a sharp price breakdown. So that your order is not carried out with one candle due to a trading failure of a bot or panic sales / euphoric purchases.
The OCO order type is quite practical for placing stops.
For example, you have opened a bitcoin position for 1 BTC. Short position – sell. Entry price $ 35,000. That is, they made a Margin Sell, as in the first example.
Next, go to the OCO order. In the order window, set the following values: PRICE USD – $ 33,000 (this is the exit price, that is, your take profit!), OCO STOP USD – $ 35,100 (this is the price of your stop order). The OCO order allows you to automatically place an order to close a position and a stop order in one window. After entering the required data, click Margin Sell and the exchange will place your order.
If the market is growing, then you can open a long position – it means, buy. Then all operations will be mirrored, as well as for the position of the shorts.
Limit and Market orders
If the market allows, it is better to always open positions with limit orders.
There is also a market order. That is, your long / short order will be executed at the market price (current), but the commission will be higher than with limit orders. It comes first in the list – a limit order.
Trailing Stop order
An interesting tool is Trailing Stop – a trailing stop.
This is an order that is triggered as a stop (closing), but follows the price.
Trailing Stop also has its drawbacks. If the price drops sharply against your trailing stop, then the exchange will execute it, but not at the current price, but at the market price at the time of order execution in the order of its turn. This can lead to the fact that the order will close your position not to zero or plus, but to minus. The Trailing Stop order can only be used in a smoothly growing market to collect the maximum movement. But it is better to close the position with a limit order (short / long based on your open position), and the trailing stop is simply canceled and used as a small insurance.