While the market is in a landslide, and a vast majority are ejecting with little or nothing left, there is always, a less than 5% winning few, who are cashing out high amounts, trading in the chaos.
They know that after a bull run comes a dip. When they see an opportunity like this, they take some good leverage and seize the opportunity, risk in all! If they were right, bam! They can get as much as 100x the expected profit. Simply because, they took as much as 100x leverage.
Is it that easy? Well NO! It comes with some painstaking effort studying the market, a good share of risk, and more importantly, knowing when to step in for a trade.
Before we continue, I would like to say that short selling is not an option for lazy, uninformed, and fear-ridden traders. So if you are any of these, we advice you not to try it out. But if not, why not.
What is short selling?
Short selling evolved from the stocks market, all the way down. It is simply, getting some leverage on a security, like stock, fiat, or cryptocurrency, and selling it with the expectation of a price decline, when you pay back.
Once the price drops to an expected threshold, the trader buys back the asset at the new market price, which is now smaller than the initial selling price.
The price difference created by a price drop becomes the interest in this trade. The inverse of this effect is known as “Long selling.” However, that is beyond the scope of this text.
Also a leverage is simply an extra borrowed amount or loan added to a trader’s initial balance, to help the trader trade with a higher amount. In other words, if you are given a 100x leverage at PrimeXBT, and you had 0.50 BTC you would have 0.5 x 100 BTC, which is 50 BTC.
Short selling isn’t limited to a particular type of trade. It can be used for day trading, as well as long-term trades. It all depends on your ability to speculate the market’s volatility, and your margin.
What is more, at PrimeXBT, we provide our traders with as much as 100x leverage on their deposit, the best tools for easy and fast trading, several payment options, helpful informational articles like this one, instant customer support, and much more.
Fundamentally, a short-selling position is betting against a market spike. However, there are several dynamics across different assets, and exchanges.
Like we stated earlier, short selling isn’t limited to one type of asset, you can short sell with BTC, ETH, XRP, EOS and several others. It all depends on what a broker or an exchange is willing to give as leverage. However, short selling in this text is limited to cryptocurrencies.
Quickly, we would look at several ways of short selling cryptocurrencies.
Selling cryptocurrency futures
This is basically, reaching a legal agreement with a seller that you would buy an asset, say Bitcoin, at a specific time in the future, at a particular price. The agreement is binding, even if the value of the asset rises or falls significantly.
This type of short selling gained entrance into the cryptocurrency market in 2011. It all started with scared Bitcoin miners, who needed to insure their assets, against a likely price decline, in the future. The downside with this is its complexity and several legal twist and turns. On the contrary, a good place to find this type of deals for cryptocurrencies, is CME or the CBOE.
Short Selling on Exchanges
This is by far the easiest and most used way of short selling cryptocurrencies; also, it will be our focus for this text. However, it is only permitted on few exchanges. Even more, only very few exchanges, like PrimeXBT, offer as much as 100X leverage.
Let’s look at a practical example of Bob, a regular cryptocurrency trader at PrimeXBT.
How Bob did a short sell at PrimeXBT
Step 1: Bob speculates a likely drop in price, from his analysis, studying recent market trends. He signs up on PrimeXBT and rolls in his first deposit of 0.005 BTC.
With 0.005 BTC deposit, Bob can leverage on as much as 100x his deposit. This will allow Bob to short sell with as much as 0.5 BTC. So, he took our 100x leverage.
Step 2: Bob opens a short position, which means selling off all 0.5 BTC leverage at the current market price of 6,970.50 USD/BTC. This was valued at 3,485 USD, at the time when Bob opened the position.
Also, he can go short, by placing a limit order, which is an instruction to PrimeXBT to sell off his 0.5 BTC, once the price reaches that of the limit order he already set.
On the contrary, the point of liquidation for this trade is 7,000 USD/BTC. This figure is assumed for this example; It is always calculated for every trade depending on the leverage.
If the price reaches this point, Bob’s speculation is considered wrong, so wrong the value of BTC has reason to a level where he won’t be able to buy back to pay for what he borrowed.
At this point, the exchange needs to break even, and take what’s left of the loan. So Bob needs to be very sure of the facts behind his speculations.
A Little Note of Warning: It is sometimes wise to, cut your little loses and close the trade fast if the price keeps rising close to the liquidation point.
Step 3: Finally, he sets his buy-stop-order, for the trade at 4,550.78 USD/BTC. This is the point; he wants to buy back the asset he sold.
– Once the price reaches Bob’s anticipated threshold, his already established buy order buys back all 0.05 BTC at 4,550.78 USD/BTC, which is the new market price.
Also, just the way Bob entered this trade, without an established sell-order, he can buy back at any price below the point of liquidation.
Another Note of Warning: It is important to stick to a realistic threshold for a buy order, because cryptocurrencies can be violently volatile. Anticipating an unrealistic price dip is one reason why many loss, when trying to short sell.
In summary, Bob’s profit is:
6,970.50 – 4,550.78 = 2,419.72
2,419.72 x 0.5 = 1,209.86 USD.
Remember Bob came into the trade with 0.005 BTC which was worth 34.85 USD at the time.
1,209.86 USD – 34.85 USD = 1,175.01 USD
So this leaves him with a profit of 1,175.01 USD, which includes both a small fee to be paid for the 100x leverage.
Finally, we would like for you to take advantage of all 100x leverage at PrimeXBT. However, for absolute beginners, who know very little about speculating trends, we advise you to start with smaller leverage points. And add in more as you gain a better understanding of the market.
But, if you are among the traders who are confident about speculating market downturns or vice-versa. Hurry now! Take our hand of leverage, and go for that short run.
More importantly, your trading progress and enjoyment is our highest priority at PrimeXBT!