What Does “Going Short” Mean In Crypto Trading

What Does "Going Short" Mean In Crypto Trading

Content provided by various contributors. DYOR.

“Going short” in crypto trading refers to selling a cryptocurrency you do not own with the expectation that its price will decrease. This allows traders to profit from a decrease in the price of an asset rather than only being able to profit from a price increase, as is the case with “going long.”

To go short on a cryptocurrency, a trader borrows the asset from another trader or exchange and then sells it on the open market. The trader hopes that the asset price will decrease and that they will buy it at a lower price. If the price does decrease, the trader buys back the borrowed asset at the lower price, returns it to the lender, and keeps the difference as profit.

However, if the price of the asset increases, the trader will have to buy it back at a higher price than they sold it for, resulting in a loss. Therefore, going short carries the risk of unlimited losses, whereas potential gains are capped by going long.

Additionally, when the crypto is borrowed, there is interest for it (typically called “margin trading” or “leverage trading” ) which needs to be paid on top of the usual price fluctuation. With the high volatility of crypto, these interests can also be quite high.

How to Use the “Going Short” Method

Traders use “going short” methods when they believe that the price of a particular cryptocurrency is likely to decrease shortly. This might be due to a variety of factors, such as:

  • Technical analysis of chart patterns can indicate that the asset’s price is likely to drop.
  • Economic and market conditions include a bear market trend or a general trend of declining prices across the entire crypto market.
  • Negative news or events related to the specific cryptocurrency or the crypto market can lead to a decrease in demand and, therefore, a price decrease.

Shorting is a more advanced trading strategy and requires a higher level of risk tolerance.

To use “going short” methods, traders typically use derivatives like futures contracts, option contracts, and leveraged trading platforms offered by crypto exchanges. These financial instruments allow traders to profit from the price movements of an asset without actually owning it.

A futures contract is an agreement to buy or sell an asset at a specific price at a specific time. For example, a trader can enter into a short futures contract, which obligates them to sell the underlying asset at a specified price in the future, regardless of the current market price.

An option contract gives the holder the right, but not the obligation, to buy or sell an asset at a specific price on or before a specific date. For example, traders can use put options, which give them the right to sell an asset at a specific price, to short a cryptocurrency.

The exchange allows users to borrow funds from the exchange to trade on margin in a leveraged trading platform. You only need to put up a small percentage of the total position as collateral, called the margin. Traders can use these borrowed funds to open short positions, effectively allowing them to trade more money than they have in their accounts.

Bitcoin live price
Btc
Bitcoin
$23.093
price
0.8732%
price change
TRADE NOW

When shorting, it’s important for traders to closely monitor the market and news developments, to minimize the risk of losing too much money if the market moves against them.

Read more from author

Editor's picks

An Overview of Different Cryptocurrency Scams

Cryptocurrency scams are fraudulent schemes that are becoming increasingly common as the popularity of cryptocurrencies continues to grow. They can take many forms and are often designed to appear legitimate investment opportunities or exchanges. Unfortunately, these scams can cause significant financial losses for individuals and harm the reputation of the cryptocurrency industry as a whole. It is crucial for anyone considering investing in cryptocurrencies to be aware of the various types of scams and to take steps to protect themselves.…

What Are Crypto Data Aggregators?

Crypto data aggregators gather data from multiple sources to provide comprehensive and real-time information about the cryptocurrency market. They pull data from various exchanges, trading platforms, and other sources to centralize the information and present it in a user-friendly format. The data includes cryptocurrency prices, trading volume, market capitalization, news, and other relevant information. Crypto data aggregators use algorithms to clean, process, and normalize the data to ensure accuracy and consistency across multiple sources. The information is then presented in…

What Is CoinGecko?

CoinGecko is a cryptocurrency data aggregator and tracking platform. It provides information and insights on the cryptocurrency market, including price, volume, trading activity, developer activity, and community growth. How CoinGecko Works Data Aggregation: CoinGecko collects crypto data from various cryptocurrency exchanges, wallets, and blockchains to create a comprehensive database of cryptocurrency information. Calculation of Metrics: CoinGecko calculates several metrics, such as market capitalization, trading volume, liquidity, and community growth, to provide a comprehensive overview of the cryptocurrency market. Display of…

What Is CoinMarketCap (CMC)?

CoinMarketCap (CMC) is a website that provides information about the cryptocurrency market and tracks the capitalization of various cryptocurrencies. It was founded in 2013 and has become one of the most popular cryptocurrency data providers. CMC aggregates information about the prices, volume, and market capitalization of cryptocurrencies from various exchanges and calculates the average value. Furthermore, the website displays this information in real-time, giving users a comprehensive overview of the cryptocurrency market. CMC tracks over 22,000 cryptocurrencies, including Bitcoin, Ethereum,…

What Are Crypto Pyramid Schemes?

A crypto pyramid scheme is a fraudulent investment scheme where returns are paid to existing investors from funds contributed by new investors. It's called a "pyramid" because it typically has many new entrants at the bottom, with each layer representing fewer investors. Example: John starts a pyramid scheme and invites five friends to invest 1 Bitcoin each. John promises to return 2 Bitcoins to each participant in a month. John needs 10 Bitcoins to fulfill his promise, so he invites…

What Is a SAFE (Simple Agreements for Future Equity) in Crypto?

Simple Agreements for Future Equity (SAFE) is a financing instrument used in the crypto and start-up communities to secure early-stage funding without giving up ownership or control. A SAFE is a contract between a startup and an investor that promises the investor a certain amount of equity in the company in the future in exchange for a direct cash investment. The terms of the SAFE, including the valuation of the company and the equity to be received, are agreed upon…

What Are Crypto Institutional Investors?

Crypto institutional investors are large financial institutions that invest in cryptocurrencies, such as Bitcoin and Ethereum. They play a crucial role in providing stability and growth to the crypto market, helping to bring more mainstream recognition to cryptocurrencies as a legitimate asset class. Crypto institutional investors typically comprise large investment banks, hedge funds, pension funds, and endowments. They bring significant resources and investment expertise to the crypto market, providing the liquidity and capital required for the market to grow and…

What Is Automated Crypto Trading?

Automated Crypto Trading is a type of trading that uses software programs to automate the buying and selling of cryptocurrencies on the market. It uses algorithms to analyze market data and execute trades based on predefined strategies. The software can be programmed to scan the market and make trades based on specific conditions, such as price changes or trends. It also allows for backtesting and optimization of trading strategies. In addition, the trades are executed automatically, reducing the need for…

What is Genesis Mining in Metaverse?

Genesis mining in the metaverse refers to the initial creation and distribution of virtual assets within a virtual world or metaverse, such as virtual real estate or virtual currency. The creators or developers of the metaverse often control this process. It may involve using blockchain technology to ensure the security and integrity of virtual assets. The term "genesis mining" describes the initial creation and distribution of these assets, similar to mining for precious metals or other resources in the physical…