short vs long crypto

From what began as an obscure technology created by a handful of wealthy individuals to becoming a household name across the globe, cryptocurrency has inspired many people to invest in digital assets. However, despite its huge popularity and potential for high returns, investing or trading in cryptocurrencies isn’t for the faint-hearted. Cryptocurrency is a highly volatile market, so it is crucial to know when to buy and when to sell.

On the surface, cryptocurrency trading sounds simple. After all, you only need to sit in front of a computer, click a few buttons, and you are done! However, the reality is that trading in digital assets is a highly intense game that demands quick decisions, willpower, and knowledge.

The crypto markets are unforgiving, so before you invest your hard-earned cash in digital assets, you need to do your research to ensure you know and understand the laws of the trade.

Whether you are an experienced cryptocurrency trader or an aspiring investor of digital assets, the chances are high that you may have heard about short or long positions in crypto, as volatile assets tend to experience these two market scenarios.

While these two terms might seem complicated, they are really useful types of trading tactics in the crypto market that allow you to profit from the price movements of a particular digital currency. But what do long and short positions in crypto mean? Peruse the article and get to know!

So, what is a long position in cryptocurrency?

When you purchase crypto coins, you typically invest money the same way as you would when you buy a stock. And just like the price of a stock, digital assets also have some value attached to them. And this simply implies that you can buy a digital asset and sell it at a later date when its value has increased.

Simply put, when you purchase a crypto coin in the hope that its price will increase in the future, you are going long. You buy some cryptocurrency expecting that its value will increase at a later time, then you can sell it and make some profits.

It is worth noting that going long is arguably the easiest way to invest in cryptocurrency. It is, therefore, the way for most people, especially beginners to invest in digital assets. It is imperative to mention that you can actually go long without actually having to buy a digital asset.

This is possible with derivatives exchanges that provide options, futures, contracts for differences as well as other derivatives instruments. When you trade in these derivatives, you simply get access to cryptocurrencies through either long or short positions without actually having to physically deal with them.

So, when should you consider a long position in the cryptocurrency market?

Generally, you should go long when you anticipate that the price of a certain cryptocurrency is about to go up for a particular duration, depending on the time frame within which you are operating. For instance, if you are trading on the daily chart are strongly believe that the price of that particular crypto coin will likely go up in the following days or weeks, then you can surely go long.

However, your decision to go long should be backed by some concrete technical or fundamental analysis. Generally, you should be very active on crypto trading platforms for you to accurately comprehend and speculate a market sentiment. What’s more, you may need to carefully study and correctly analyze patterns on the charts and check, for instance, whether the price has broken above a key resistance line, indicating the extension of an upward trend.

Regardless of the type of analysis, you may be using, you need to be confident enough that the price of that particular cryptocurrency will go up. Otherwise, you may find yourself going against the market trend!

So, how can you minimize risk while longing cryptocurrency?

Risk management is one of the essential elements of successful trading, and crypto trading is no different. No matter how good or accurate you think your decisions are, nothing is ever guaranteed with cryptocurrency trading. Every investor takes a hit from time to time but having a risk management strategy will ultimately help you to remain in the game for the long haul.

One way of reducing risk while longing cryptocurrency is through stacking stats. If you were not aware, stacking stats is a common term used in the cryptocurrency world, and simply refers to building your holdings by buying small amounts of crypto coins at a time, or frequent intervals. The idea is pretty simple, you buy small amounts of digital currency and gradually accumulate a decent long position.

This strategy helps minimize losses incurred due to cryptocurrency’s high volatility and creates a fairly more consistent growth platform over time.

So, what is a short position in cryptocurrency?

Simply put, the opposite of going long is to go short. Just like you can make money when the price of a crypto coin goes up, you can also make money while its price is falling.

When you take a short position on a cryptocurrency, you are essentially borrowing that particular crypto coin with the expectation that its value will decline in the near future. The aim is to sell at a relatively higher price and then pay back your lender and at a lower rate when the value of the coin drops, by which time you would have pocketed the difference for yourself.

To help you understand how shorting works, have a look at the below scenario:

You short sell 10 Bitcoins when the current price is $5,000. This implies that you are burrowing 10 Bitcoins and selling them back at $50,000.

Then after a while, the price of Bitcoin falls to $3,000. You then purchase them back at $30,000 and return them to the broker or whatever party you borrowed them from. You then keep the profit, which in this case is $50,000-$30,000= $20,000.

It is important to mention that shorting cryptocurrency is somewhat difficult, and requires you to have both the skills and readiness for analytics and prediction. Simply put, not everyone who trades in cryptocurrency can handle the falling market!

So, when is the best time to short sell in a crypto market?

Shorting crypto coins simply means you are trading against a positive trend. And the longer this upward trend continues, the riskier shorting becomes. Another thing worth knowing is that the maximum profit that can be realized on a short sale is limited to a cryptocurrency price of $0 but there is no cap on the returns of buyers.

If you have experience in analyzing cryptocurrency market trends on price charts, you may have realized that bullish moves usually take time to build and develop, whereas bearish moves tend to be somewhat short and sharp. As a result, trying to determine the exact time to short sell cryptocurrency can be a tough and intimidating task.

Thankfully, experienced crypto traders can use both technical and fundamental analysis to help gauge the direction of token prices. Crypto traders who follow a strategy based on technical analysis usually review historical price charts by looking at past trends and using technical indicators.

There are a variety of technical indicators that can help you determine whether the price of a particular coin will drop or increase within a specified time frame. And moving average convergence divergence (MACD) is one such tool that helps you decipher both the momentum and strength of a price trend.

Although the cryptocurrency market is relatively new and thus lacks the historical value of some digital assets, it is also possible to apply fundamental analysis strategies to cryptocurrency markets. When you decide to use fundamental analysis as a strategy for analyzing the market, you may start by uncovering the key driving forces behind the supply and demand of that particular crypto coin.

In this regard, variables that affect the demand for cryptocurrency may include market sentiments, news, adoption, trading, and perhaps transactional activity. You can follow this link for more insight on technical and fundamental analysis techniques.

As explained earlier, you should always back your decision to go short with a solid market analysis. As a general rule, you should go short when the market has reached an overbought level. This simply means that the price of the coin you are trading in has increased for an extended period and the uptrend might have supersaturated.

And one popular technical analysis tool that can help you to determine is a particular digital asset is overbought or oversold is Bollinger Bands. Also, going short can be a viable option when the price can’t break a resistance level and starts moving from it.

Bearing in mind that cryptocurrency is an extremely volatile market, coins usually display very sharp fluctuations without any analysis actually backing these variations. This makes it even more difficult to correctly predict the market trends. Regardless, you should always do your research and try to know the factors that might be impacting the market before making any decision.

The Bottom line:

Both long and short positions are key investment strategies in cryptocurrency trading and anyone who wants to become a successful digital currency investor must know and understand them. Smart cryptocurrency investors usually combine these two strategies to diversify their risks and create a profitable investment portfolio.

As you already know, the cryptocurrency market is a highly volatile one, and by combining the two strategies, you can make a profit as prices fall and rise, both of which inevitably occur throughout the year. You only need to be smart enough to know when that particular cryptocurrency is overvalued and when it is undervalued.

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