Long and Short Positions in Crypto Trading
Long and short positions are the two basic terms every trader learns at the very beginning of their trading journey. Going long is to own the asset and expect the price to increase, while shorting is waiting for the price to go down and buy back the asset at a better price to make a profit
Unlike other assets, cryptocurrencies are highly volatile, and that can work in the trader’s favor whenever they succeed in deriving profits from price fluctuations. Regardless of what trading style or strategy you’re choosing, understanding core concepts like short and long trades is a must.
Short and Long Terms Basics
In the middle of the XIX century, the terms came into general use in the US stock and commodities market. When the first crypto markets started making their appearances, short and term positions quickly became a part of the trading slang as well.
Bull traders expect the price to rise and hence hold long positions while bears expect the price to go down, so they sell the asset, to buy it back at a better price. Now, let’s look into what this means in practice.
In a long position, traders assume that the asset price will rise from a current point. Thus, the trader chooses to “go long” and buys the coins. At the same time, in a short position, the trader thinks the price will now start falling and “goes short”, selling the digital assets.
Long Positions Action Plan
When going long, traders use a universal profit-making strategy of buying cheaper and selling more expensive. This behavior is often typical for beginners.
Here’s how you do it:
- Analyze the market, find an asset that is most likely to go in price in the near future, and buy it;
- Wait until the price starts rising. Sometimes, it might take a while;
- Sell the asset and enjoy the profit.
The trickiest part is to sell the asset on time. Considering it is not easy to predict when the price stops rising, chasing the highest price may be a losing game. If you lose the opportunity to sell for profit, you have a couple of options: One is to absorb the losses and sell their assets. Another is to wait until the price rises again.
It’s worth noting that long trades are very common and can be executed on any exchange.
Short Positions Action Plan
When traders go short, technically, they sell the assets they do not own yet to buy it later at a lower price. Fundamentally, the short trades concept implies that the assets have to be borrowed before selling.
That’s your basic action plan when going short:
- Analyze the market and look for the coins that might go down in price
- Loan them from the exchange and sell them instantly
- When the price falls, buy back the coins you sold and pay back the exchange
Short trades are not universally available, and you need to make sure your exchange is offering this service. HitBTC is one of the few exchanges that features margin trading, allowing traders to go short.
Margin Trading
Margin trading enables traders to open short and long positions, considering they provide collateral. The collateral is a funds deposit that serves as a guarantee that the debt will be repaid. Margin trading is similar to credit leverage and practically increases a trader’s deposit by using a loan. In crypto, the coefficient may vary drastically, from 2:1 to 100:1 and higher.
Suppose everything goes according to the trader’s plan. In that case, their profit will increase proportionally to the leverage, and when the position is closed, the collateral and the fees will be paid back. Also, the remaining amount (trader’s actual profit) is deposited into the user’s account.
If a trader’s predictions are wrong, and the asset goes in the opposite direction than the trader predicted, the exchange will liquidate positions and repay the borrowed funds to the trader once the asset price matches the loan amount. Before the liquidation, the trader will receive a margin call, meaning a request for more collateral in order to avoid complete liquidation of the position.
Moreover, traders are free to close the unsuccessful trade themselves at any period before the liquidation without losing the entire position but only a part of it.
Longing and Shorting Crypto via Margin Trading
Longing crypto can be done by buying Bitcoin on the exchanges and selling it when the value rises. However, a more advanced and profitable way to long crypto is to use margin trading on exchanges like HitBTC.
When longing via margin trading, one will have to put up collateral to borrow money and use it to purchase more crypto. The advantage of margin trading for long trades is that they can be exceptionally profitable, however, it does come with a certain risk.
As for shorting crypto, margin trading is the easiest and most widely-used way to do it. Benefiting from both rising and falling prices makes shorting a more flexible strategy.
Advanced trading strategy
When trading in volatile and high risk financial assets such as crypto, you may choose to hedge, or in other words protect your portfolio from losing value, by using techniques that lessen the impact of unpredictable negative events.
If you are long on a crypto asset, and you believe that the long term value will increase, however, you analyse the market and see that there is a potential fall in price in the near future, you may use margin trading, and short the same asset using leverage. If you expect a 5-10% price decline it is a reasonable hedging strategy to short 5% of your position, so that in case the price goes down, you have some protection for the losses, and if the price continues the bullish upwards trend, you benefit as your overall position is long on the stock.
Furthermore you can protect your position by using limit orders to buy or sell at certain prices, which may often be a safer option as it executes commands with machine-like speed, and can operate when you are away from the terminal. You can read more about such orders here.
Final Thoughts
You have to keep in mind that trading is a high-risk activity. As a trader, you need to try minimizing risks while making sure you still get your profit.
The idea of going long is in essence buying an asset expecting it to go higher in value so potential profit is unlimited when opening long positions, but you cannot lose more than you initially invested. For instance, $50 worth of coins can potentially end up being worth $50,000 if the token price goes up drastically. Meanwhile, if the price drops, you won’t lose more than $50. Those who look for higher profits can also use margin trading to go long in crypto. Using Short trading has a similar underlying mechanism, and you cannot lose more than you initially invested.
Overall finding the optimal trading strategy that is most suitable for you comes down to market analysis and personal risk tolerance. Do your own market research and choose the instruments that suit your trading profile the most.
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