There are two main approaches when trading digital assets: long and short. The former allows one to profit from the price increase, while the latter is used on the falling market. This article will answer the most common questions beginners face throughout their crypto journey.
What are short and long positions in crypto trading?
Going long is a process of purchasing and owning an asset in anticipation of a bull rally. Let’s imagine that you believe that the crypto price will go up — typically, it happens when the rate breaks through strong resistance.
Thus, you open a long position:
- Buy an asset at a lower rate.
- Wait for its price to increase.
- Sell the purchase at a higher rate.
The end of 2017 was an excellent time to go long: in December, Bitcoin almost doubled in price from $10k to $19,9k.
Short trading is selling an asset at a higher price and repurchasing it at a lower cost to profit on the difference. Short positions are a good strategy for a bear market when the cryptocurrency price drops significantly. Since shorting may be harder to grasp, let’s review the entire process.
BTC’s current market rate is $10,000. You believe that it will break through significant support at $9,500 with a further drop to $5,000. To make money on the decline, you open a long position:
- You borrow 5 BTC and sell it at a market rate of $50,000.
- You wait for the price to drop twice and repurchase 5 BTC for $25,000.
- You give back the borrowed BTC and enjoy $25,000 of profit.
Which is more profitable: short or long?
Long positions are twice as profitable as short ones. Here are some numbers to prove that:
- You borrow $50,000 and buy 5 BTC at a market rate of $10,000.
- You wait for the price to grow twice and sell 5 BTC back for $100,000.
- You give back the borrowed $50,000 and enjoy an additional $50,000 of profit.
Should I only go long, then?
Unfortunately, that’s impossible. No asset can show constant growth without any downs, and the current bear cycle is proof. Stocks have already fallen 15-25%, while some cryptocurrencies lost more than half of their price. Suppose you want any financial market to become a regular income source. In that case, it’s vital to learn how to profit during both uptrends and downtrends.
That said, if you don’t want to conduct technical analysis and research market conditions, going long for a reliable asset with stable growth has a better chance of ending up with a profit.
What are the risks?
Regarding any trading approach, the most significant risks come with leverage. You have to pay daily fees when you borrow money to maximize your profits for both short and long positions. In case your forecast is wrong, you will lose more money. However, it is also an excellent way to make short-term income since not everyone has capital and 5-10 years to wait for the profits. We recommend starting small: get some experience, create an effective trading strategy that generates regular profits and then consider using leverage.