Shorting cryptocurrencies makes money while conserving resources. Cryptocurrencies are a new type of currency and it takes time to develop them. This process consumes energy and other resources. By shorting, you get paid for your efforts without having to spend any resources. Here at Mulah we have compiled the perfect guide to help you understand the process of shorting crypto.
Short selling is basically betting that an asset will fall in value. So short sellers use borrowed money to bet against an asset. This means they hope the price of the asset falls. But if the price rises instead, they lose money.
Shorting means taking a position to profit from a falling price. This guide explains how to do it, and why you should avoid doing it.
What does ‘shorting’ mean?
Short-selling is when someone borrows shares of a company and then sells them at a lower price than what they paid for them. This means that the person who borrowed the shares gets more money back than he or she originally invested.
Short-sellers borrow shares of an asset or stock and then sell them before the price drops. This is called “shorting” the asset or stock. When the price goes up, they buy back the shares and return them to the lender. Investors who believe the price of an asset or stock will drop use this strategy to make money off other investors’ bad predictions.
So, let’s assume for example the stock is “SpaceX”. The investor might research how well the company is performing, and discover that the space industry as a whole is in decline, but that NASA and Boeing are both growing rapidly, and look to soon be overtaking SpaceX’s position in this particular sector.
After borrowing the shares of SpaceX, the investor would then sell these shares to buyers who are willing to pay the full market price.
Investors are speculators who make money by buying stocks when prices are low and selling them when prices are high. Speculators are hoping the price will go down before the stock goes up again. This strategy is called short-selling.
How does this work with cryptocurrency?
Shorting means selling an asset before you buy it back later at a lower price. This strategy works well when prices are rising. You can use this technique to make money by betting on a falling market.
In this situation, an investor borrows tokens in a type of crypto — let’s say it’s Bitcoin for the sake of argument.
They would then sell their Bitcoin tokens at a price they’re comfortable with, wait until the price of Bitcoin drops, and then buy the tokens again at a lower price.
The profit margin, here, would be the difference between the price they sold it for before the value went down, and the price they paid for the tokens at the lowered value.
After this, they could transfer their Bitcoin tokens to real money — dollars or pound sterling for instance — and effectively withdraw this as real money.
Risks involve
Short selling strategies come with their own set of risks.
Shorting stocks is a risky business. Investors need to do thorough research before entering into such a deal.
However, even those that are properly informed can make assumptions which do not always add up. The value of anything, whether it is virtual or real, is subject to change — be it because of political and social events, industry changes, market shifts or simply changes in buyer whims.
Shorting stocks can be risky because there is always a chance you could lose money if the stock price doesn’t fall enough.
Cryptocurrencies are very volatile. An error in judgement during the long-short trading stage can lead to big losses.
When you borrow bitcoins to short-sell, make sure you know what you’re doing. You should be aware of your budget and limit your losses.