Long and Short Positions in Crypto

Change, just like uncertainty, is a constant in crypto trading. The profitable strategy and correlations that generate profits today may not work tomorrow or next week. Since all battles are won or lost before they’re fought, profitable traders have learned to adapt to changing trading strategies so money can follow them.

To help you achieve your goal of making the best trades, this article explains the concept of long and short positions in crypto trading to help you make informed decisions.

Shall We Begin?

If you’re still learning the ropes in cryptocurrency investments and have heard experienced traders declaring “long” and “short,” they’re referring to strategy and not just jargon. Size and direction in trading define a position, and determining a position is critical.

Correctly understanding the difference between a long and short position is essential. Both positions are statements of market commitment and can change depending on the crypto asset you own, whether you’re buying or selling or whether you’ll make or lose money.

Without this vital knowledge, you could encounter unpredictable losses in the future or miss the bus from market opportunities occasioned by crypto price fluctuations.

Understanding Long Positions

A long position refers to a situation when a trader believes the value of a crypto asset will appreciate. This kind of position works well during a bull market environment and involves buying a targeted cryptocurrency and hoping to sell it later for a profit. Long positions in crypto trading are all about buying low and selling high.

Traders taking long positions habitually HODL on their assets for extended periods ranging from days, months, and sometimes years since the position is considered less risky, seeing that most assets display positive price movements over long periods. Long trading is best for you if you’re optimistic about a crypto asset’s long-term potential.

Let’s assume the price of Bitcoin is $20,000, and after you’ve observed crypto market trends, done careful market analysis, and believe BTC is about to go up, you establish a long position for 10 Bitcoins. The amount of capital you’ll need would be $200,000. Once Bitcoin reaches $22,000, you close your position and make a profit equal to the buying price and selling price, thereby creating a profit of $20,000.

Understanding Short Positions

A short position, on the other hand, is the opposite of a long trade and enables traders to make profits even during a bear market. The strategy involves:

Borrowing a crypto asset.
Selling it on the crypto market before you can buy it back at a lower price.
Keeping the profit is the difference between the selling and buying prices.

Short positions involve selling an asset high and repurchasing it low.

Short positions are primarily held for shorter durations, ranging from days to weeks, enabling traders to sell assets without owning them and profit from the price difference. Short trading is primarily beneficial when traders expect a bearish outlook of a specific asset and hope that the price could decline.

Let’s create an imaginary situation with the price of Bitcoin being $20,000. Suppose you open a short trade with 10 BTC for $200,000. However, you borrow the 10 BTC and sell each for $20,000 but the price of Bitcoin drops to $18,000, meaning you stand to benefit from the price difference. When you close the short position, you remain with $20,000 since BTC is now worth $180,000 compared to the $200,000 worth of crypto that you borrowed.

Long vs. Short: Key Differences

We’ve already discovered that short and long refer to the position in which a trader expects the price of a crypto asset to move in a bearish or bullish market. The following are fundamental differences between both positions.

Long Position

Direction: When users go long, they buy a cryptocurrency, hoping its price will increase. This means being bullish on the crypto asset’s value appreciation.

Process: The user buys an asset at the prevailing price and aims to sell it later at a higher price for a profit.

Profit Potential: The price potential in long positions is hypothetically unlimited as long as the asset’s value rises.

Risk: Considering crypto volatility is expected, a trader could significantly lose if the asset’s price drops.

Short Position

Direction: A user taking a short position sells a crypto asset borrowed from an exchange or a broker, expecting its value to decrease, meaning they’re riding on the asset’s bearish sentiment.

Process: Once the trader sells the borrowed asset at the market’s prevailing price, they aim to repurchase it at a lower price and profit from the difference.

Profit Potential: The price potential of a short position is capped at the asset’s initial price at the time of borrowing. In the unlikely event that the asset’s value drops to zero, a trader could make maximum profit which is the initial price.

Risk: Nonetheless, a trader’s potential losses are hypothetically unlimited should the asset’s prices go up, as they’ll be required to repay the asset they borrowed at the higher price.

Trading Strategies for Long and Short Positions

Common Strategy for Long Positions

Choosing a long position so you can theoretically make a profit from buying low and selling high is especially suitable for beginners. The following tips will come in handy:

Observe crypto market trends and choose assets whose value is likely to increase shortly.
Choose previously analyzed assets.
Sell at a specific price point once the price begins to rise.
Develop a profit and loss strategy.

Common Strategies for Short Positions

A short position, on the other hand, involves selling borrowed crypto assets and buying them back at a lower price. Use the following strategies to become successful:

Conduct solid market analysis to decide which cryptocurrencies can potentially lose their value.
Use charts, graphs, and other tools to conduct technical analysis before opening a short position.
Conduct a fundamental analysis to know the right time to buy back the asset and return it to the lender.
Create a definite target profit and loss plan.

Remember that while crypto trading is inherently risky, your primary target as a trader is to choose a position that helps reduce these risks. The key to success lies in conducting market research, learning risk management, continually educating yourself, and refining your trading strategies to manage profit and loss margins.

Real-World Examples

According to CNBC Make It, Cooper Turley started crypto investment in 2017 when Bitcoin was less than $2,000, and Ether was trading at a few hundred dollars. Turley bought both, and by 2021, he had grown his investment by over 90% within just about two years, thanks to his early investment, hard work, and perseverance.

On the other hand, six months before the FTX exchange collapsed and the stablecoin Terra blew up and wiped off over $1 trillion in value, a hedge fund called Galois Capital saw an opportunity after smelling something rotten at Terra. The hedge fund took a short position, believing that the price of Terra would collapse, and guess what, the bet paid off handsomely. Galois went on to reap an abundant windfall for making a move when everyone else stood by watching.

Tips for Long-Term Investors

While both short and long positions carry a particular element of risk, short positions are more appealing since there’s a profit potential when the prices drop.

However, long-term investors can employ the following strategies to maximize their ROI:

Diversification: To minimize risk, diversify your investment across different crypto assets. You can mix established cryptos with new promising projects.
HODL: Use holding strategies to buy and keep your holdings for extended periods to increase the chances of selling at a higher price later.
Dollar-cost averaging: Employ the dollar-cost averaging strategy where you regularly buy a fixed dollar amount for a specific asset, whatever the price. This eventually averages out your acquisition over time, regardless of market conditions.
Research: Take the time to conduct extensive research on the underlying technology of cryptocurrencies and different trading strategies, including derivatives trading, margin trading, and others. This will help you identify solid projects and techniques with growth potential.

Conclusion

Long and short positions are essential for anyone interested in crypto investments. Whereas some stigma still surrounds these strategies, especially short positions, realizing that they can help you capitalize on crypto volatility is essential.

Whether it’s a bull market or a bear market, there’s always a chance for profitability at any given moment. You need to garner a lot of investment advice if you’re new to the market to capitalize on falling prices with a short position or rising prices with a long position.

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