Short-Selling Cryptocurrency is not a new idea or method. In fact, the first documented short sell took place in 1609, when Isaac Le Maire, a sizeable shareholder of the Dutch East India Company, colluded to push the price of his own stock down in order to sell and buy them back for a profit — a now-illegal practice, colloquially known as a ‘bear raid’.
Many of us have heard of ‘shorting’, but understanding the concept can be challenging, especially if you’re not familiar with long-term investment and trading strategies.
In essence, ‘shorting’, is the practice of predicting that a stock’s value is going to decline, borrowing and then selling off shares of that stock at its market price, and then buying it back again once its value has dropped to return it to the lender.
The concept can be applied to any kind of investment strategy; including those which deal with the value of the currency.
What are the Risks?
As with many types of trading strategies, there are several risks involved with the process of short-selling. This is because it involves banking and placing real money on the fact that the value of something will fall. Because of this, it requires a great deal of industry and market insight, as well as an understanding of economical and environmental factors which are likely to impact value fluctuations.
Further to this, markets can shift in unprecedented and often unpredictable ways — whether due to unforeseen changes to competitor performance, social events, season shifts, or simply changeable consumer interests.
The risk, then, with short-selling is that you make misinformed or incorrect decisions about a potential fall in the value of an asset or stock. This would then lead to you being unable to make any profit.
Another risk involved with this method of trading is incorrectly timing the ‘sell-out’. If you do not wait long enough for the stock value to decline, you won’t be able to make a profit and if you wait too long, you risk losing all the money you invested. Timing, then, is everything when it comes to shorting.
How do I Safely Short-Sell Cryptocurrency?
When it comes to shorting cryptocurrency, the current risks that are involved with short-selling stocks are magnified. Cryptocurrency markets are extremely volatile by nature, meaning they’re prone to shift more drastically and more quickly.
Because of this, they’re also harder to predict.
As a result of that, there’s no real ‘safe’ way to short-sell cryptocurrency. But there are ways to minimize the risks involved. Here’s how:
Wait for a downward turn
Cryptocurrencies like Bitcoin are extremely volatile, and their value can depreciate as quickly as they appreciate.
Because of this unpredictability, it can help to wait for a downward turn before deciding to short-sell. This can give you a clearer indication of patterns and trends.
Sentimentality can be a big pitfall for any investor, and this includes when trading with Bitcoin. For example, you may have been one of the initial investors in Bitcoin, before it became so popular and widely used. This could have its drawbacks and may mean losing your initial investments and/or your shares.
Keeping a clear head, and an objective view of the market and its fluctuations will help you to make better-informed decisions when trying to short any kind of cryptocurrency.
Any kind of investment requires you to be highly informed about a market — and everything that surrounds it. That includes the industry it sits in, social implications, economical factors, and consumer trends.
For those looking to short anything, including cryptocurrencies, keeping up-to-date with this information is crucial to minimizing the risks involved.