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How to Long and Short Crypto Coins

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How to Long and Short Crypto Coins

If you’re brand new to crypto trading, the endless amount of jargon can seem extremely intimidating.

There are two types of crypto trading positions: long positions, and short positions. (NOT RECOMMENDED FOR NEWBIES)
Traditionally, these terms have been associated with hedge funds. But increasingly, they are being used in association with cryptocurrencies.

Explaining the difference between a long strategy, a short strategy, and a long/short strategy

A long investment strategy, often referred to as “taking a long position”, means you’re buying an asset outright with the expectation that it will increase in value. An example of this would be buying Bitcoin or Ethereum on a marketplace and holding it with the hope of it increasing in value.

A short investment strategy, often referred to as “taking a short position”, means you’re borrowing the asset instead of buying it outright. This is generally done when you’re expecting the value to decline, because you can sell the asset at a high price, and then pay your lender back at a lower rate after values decrease – then you can keep the difference for yourself.

As you might have guessed, a long/short strategy is essentially a combination of both of these strategies. It means that you take a long position on assets that you expect to increase in value, and a short position on assets that you expect to decrease in value. And you make a profit from both.

Example: Going Long

Say Ethereum market price is $314.7. You think that the Ethereum price will go up, so you buy 200 of ETH’s at $314.7. This is equal to the position value of $62,940.

Because PrimeXBT offers leveraged trading, you don’t need to put up the full value of this trade. Instead, you only need to cover the margin, which equals to 1% of a total position size, or $629.40.

If your prediction is correct and ETH price climbs, you may decide to fix a profit. Ethereum price is $354.2 and you close your position.

To calculate your profit, you need to multiply the difference between the closing price and the opening price of your position by its size.

354.2-314.7=39.5, which you multiply by 200 and get a profit of $7,900 because you had a “long” position.


Example: Going Short

The Bitcoin is trading around $7,400. You anticipate the upcoming negative news about cryptocurrency market, which will negatively impact the price of BTC, so you decide to sell ten Bitcoins at $7,400 for a total short position of $74,000 in value.

Bitcoin has a margin requirement of 1% (1:100 leverage) so you need to deposit $74,000×1%=$740 as margin collateral.

The announcement is a disappointing one, and the Bitcoin drops to $7,354. You’re ready to secure your profit, so you buy back 10 BTC at $7,354

Because this is a short position, you deduct the closing price ($7,354) from the opening price ($7,400) of your position to calculate profit, before multiplying by its size of 10.

7,400-7,354=46, which you multiply by 10 and get a profit of $460 because you had a “short” position.

What is a successful long/short crypto strategy for beginners?

The best strategy is one that enables you to diversify your investment portfolio. Because crypto coins are so volatile, you ideally want to do a bit of both longing and shorting.

In order to “go long”, you want to look for cryptocurrencies with long term profitability. This is more likely to be the more popular, well-known coins with a large market cap, such as Bitcoin and Ethereum.

To “go short”, you want to look for cryptocurrencies that will enable you to quickly profit from price drops – think of memecoins like Dogecoins, which rise and fall depending on Elon Musk’s tweeting habits!

A few years ago, Motley Fool co-founder David Gardner shared an invaluable piece of advice for new traders. It can be applied to any kind of trading – but it fits crypto trading particularly accurately:

“Stocks always go down faster than they go up, but they always go up more than they go down.”

Take some time to study some crypto price charts, and you’ll notice that many of them tend to follow this rule.

There are two types of crypto markets where you can use long/short crypto strategies: derivative markets, and spot markets

A spot market is the most common type. It allows users to buy and sell crypto at any time, but also comes with limitations – traders will only make money if the price of an asset goes up; if the price of an asset goes down then they will lose money.

The derivative market, on the other hand, is based on speculation. A derivative is essentially a secondary contract that derives its value from the performance of an underlying asset. You might have heard of crypto futures, crypto options, and perpetual contracts – these are the most popular crypto derivatives.

For instance, you might believe the price of Bitcoin will go up, while someone else believes it will go down. You both sign a contract. After a period of time, once the price has changed, one party will be required to pay the other party the difference in price.

Over the past couple of years, there has been a surge in the crypto derivatives market. In May 2021, it reached its peak with a total trading volume of USD 5.5 trillion.

(Bonus Content) Additional Terms For Your Knowledge : 

  1. Share market: Anywhere you can buy or sell shares. All stock exchanges across India are part of the Indian share market. Any shares that you buy or sell outside the exchanges are also part of this share market.


  2. Stock exchange: This is a specific facility where stocks are listed for sale/purchase. All stock exchanges in India are now digital, and you can access them online through a brokerage firm.


  3. Over-the-counter: If you trade a security that is not listed in a stock exchange, you are making an over-the-counter trade.


  4. Stock: Stock is a general term used to refer to a certificate indicating ownership in a company.


  5. Share: A share is a stock certificate of a particular company. So, if an investor says that she owns 10 stocks – she is most likely referring to shares from 100 different companies. On the other hand, if she says she is buying 100 shares, she is referring to shares of a single company.


  6. Bull market: When stock prices in a market are generally rising, it is called a bull market.


  7. Bear market: The exact opposite of a bull market is a bear market – when the stock prices in the market are generally falling it is called a bear market.


  8. Order: It is a show of intent to buy or sell shares in a given price range. For example, you may place an order to buy up to 100 shares of Company A, at a maximum price of Rs. 80 per share.


  9. Bid: Your bid is the amount that you are willing to pay for a share.


  10. Ask: Ask is the price at which you are willing to sell a share.


  11. Bid-ask spread: This is the difference between the amount people are willing to spend to buy a share and the amount at which the shareholders are willing to sell a share. A trade can only happen when this spread is resolved. That is, if the lowest price at which a share for Company A is being sold is Rs. 40, and the highest price someone is willing to pay for such a share is Rs. 38 – no trade can happen. The trade can only happen when the bid and ask prices match.


  12. Market order: An order to sell/buy shares at the market price is called a market order. It is advisable to avoid placing market order as the trade price can be very volatile.


  13. Limit order: An order to sell shares above a set price or buy shares below a set price is called a limit order. You should always use limit orders to trade shares.


  14. Day order: An order that is good only till the end of the trading day is called a “day order”. If the order does not get executed by the time the market closes, it would be cancelled.


  15. Good-till-cancelled order: An order that will stay open until it is either executed or manually cancelled. Such orders may stand for weeks if no shares are available to trade in the price range specified. For example, if you place a GTC order to buy a share of Company A for Rs. 50 or less and the share is currently trading at Rs. 70. If it takes the share to hit Rs. 50 price point a week later, the order will be executed then. If it were a day order, it would have been cancelled at the end of the trading day itself.


  16. Liquidity: Liquidity refers to how easily a stock can be sold off. A share that can be sold off quickly i.e. has high trade volumes is said to be highly liquid.


  17. Trading volume: The number of shares being traded on a given day is called trading volumes.


  18. IPO/Initial Public Offering: The first time a company offers its share for trading on a stock exchange. Typically, you buy shares from the previous owner of the share and not the company directly. In case of an IPO, you get to buy the shares directly from the company.


  19. Market capitalization: Market capitalization is simply the value of the company as per the stock market. That is, the current value of all its shares put together.


  20. Mutual Funds: Mutual funds is a way of investing across a large number of stocks by pooling your funds with other investors. This allows you to diversify your investment even if you have limited funds. Further, a fund manager takes care of selecting the right stocks to invest in.


  21. Exchange-Traded Funds: These are mutual funds that you can trade like shares on the stock exchange. They usually track an index.


  22. Index: A benchmark that is used by investors and portfolio managers to measure market performance. Nifty and Sensex are such benchmarks. If your portfolio returned 10%, that may sound really good. But if the Sensex returned 12% during the same period – your portfolio did not perform very well.


  23. Portfolio: Portfolio is simply the collection of all the investments an investor has made.


  24. Intra-day trading: Intraday trading is about buying and selling stocks on the same day so that all positions are closed before trading hours are over on that day.


  25. Dividends: Dividend is a part of the profit distributed by a corporation among its shareholders. When a company earns profit during a financial year, a part of that profit is usually distributed as dividends among its share holders.