What is long and short on the cryptocurrency exchange in simple words
As on other trading platforms, on the cryptocurrency exchange, traders seek to make a profit by playing on an increase or decrease in the value of an asset. On the stock exchange, such positions are called “long” and “short”. Let’s talk more about the essence of these concepts in stock trading later.
Long when trading cryptocurrency
In trading on the stock exchange, it is customary to call a long position opened by a trader with the expectation of an increase in the price of an asset, in our case, the value of a cryptocurrency.
Longing involves buying a digital currency at a low price and selling it at a higher price in the future. Such transactions are considered classic. With their help, beginners usually start trading.
The trading scheme in this case will be as follows:
- Search and purchase of a promising cryptocurrency (the value of which should grow in the near future).
- Expectation of price growth. Sometimes you have to wait a long time, especially if the trader has no experience and is unable to predict the market movement.
- Sale of previously acquired cryptocurrency. If the forecast is correct and the price has really gone up, the trader earns on the difference between the purchase price and the sale price.
Short when trading cryptocurrency
A short in trading on the stock exchange is a short position designed to lower the price of an asset. Such transactions are inherent in a bear market, when there is a decline in the price for a long period of time. Unlike long, short assumes that the trader does not have a cryptocurrency at the time of sale. That is why it is also called an uncovered sale.
The trader bets on lowering the value of the digital currency, which he borrows from the trading platform. If the value drops over time, the trader buys the currency at an even lower price and earns on the difference, while not forgetting to return the borrowed tokens. By the way, margin trading is based on this.
The algorithm for opening and closing a short position includes:
- Market analysis in order to find a cryptocurrency whose price should decrease.
- Purchase of foreign currency in debt.
- Sale of borrowed cryptocurrency.
- The expectation of a fall in value.
- Buying cryptocurrencies at a lower price.
- Repayment of the debt to the trading platform. At the same time, the difference between the sale and purchase price is the trader’s profit.
Short positions are more often used by professionals, because with a competent investment of funds, the profit from such transactions may be higher than when opening long positions.
Examples of short and long
The easiest way to explain how this works is by using examples of transactions with bitcoin. Probably, everyone remembers how in 2017 the increase in the value of this cryptocurrency reached an unrealistic 900%. Back at the beginning of the year, the price of bitcoin was about $ 1,000 per unit. By the end of the year, its value reached almost $ 20,000. With a stable growth in the price of the currency, a long position could be opened at any time of the year and at the same time make good money. For example, if a trader bought bitcoins at the beginning of 2017, then by the end of the year he earned several times more on the sale than he invested.
If the trader from the previous example had not gotten rid of the significantly increased bitcoin price, he would have been disappointed in the next 2018. The whole next year there was a drop in the price of bitcoin and by the end of the year its value decreased several times. For asset owners, this is bad news, but during the period of falling prices, you can earn on short positions.
Let’s say a trader has already realized that a steady bearish trend has taken hold on the market, and the price of bitcoin will fall. He borrows 20 bitcoins for $ 5,000 each, sells them and earns $50,000. The trader waits, and after a couple of months, the price of bitcoin drops to $ 3,000. He buys cryptocurrency, returns 10 borrowed BTC and makes a profit. The latter is formed due to the difference in the sale price and the price at which the trader purchases cryptocurrency in the future. In our example, the difference is $20,000.
What to choose for a layman
Long is considered a classic type of transactions on the stock exchange, accessible to a beginner. When opening long positions, the risks are not so high. In extreme cases, the price of the cryptocurrency will drop to zero and then the trader will lose the initial investment. If the price starts to rise, you can get a good profit at the peak of the cost. At the same time, the waiting period for price growth may be longer than the newcomer expected.
If you have no experience in stock trading at the start, it is better to limit yourself to long positions. But with the acquisition of skills regarding market analysis, you can try yourself in a short. Short positions, with the right forecast, can bring much more profit than long ones. However, the trader’s risks are increasing, because the price may go up. It is possible that in the most unfavorable scenario, the trader will not be able to return the borrowed tokens to the platform.
Published: 17 September, 2022