Short comes from the term “short sale” which means “short sale”. Shorting a cryptocurrency thus amounts to betting on its decline and making money when the price falls between the purchase price and the sale price. This is a trading method that offers many possibilities, including pure speculation, but it is also a way to lift your portfolio. We explain all this in our guide.
What are shorts?
Shorts is “selling short”, that is, to sell an asset that one does not hold with the goal of buying back the contract later at a lower price. If the investor decides to short a cryptocurrency and the value of the underlying falls, then the difference between the purchase price and the sale price makes it possible to generate capital gains.
Shorts are allowed make money when financial markets go downbut not only, it also offers the possibility of hedging against the risk of a drop in the price of cryptocurrency.
It is not strictly speaking a “direct” investment, because it is the derivative product that replicates the underlying (the cryptocurrency) that we buy, and not the underlying itself. A big difference, because it makes it possible to estimate the fall of an asset that one does not hold, but also to use leverage.
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What is leverage?
Leverage allows you to increase your market exposure with a small starting bet and works both in the buy and sell direction. Unlike a spot trade where you need to hold €100 to buy 100, leverage gives the trader the ability to invest more than the initial capital.
How? He spent only part of the investment, the rest was given to the intermediary who gave him credit. Only condition for opening a position, the intermediary requires a security deposit, which is equivalent to a deposit. Every day this deposit, also called “margin call”, changes according to market conditions.
If the position is in deficit, the margin call increases: the intermediary needs a higher deposit to keep the position open. If the trader fails to pay the cost of the margin call on time, then the position is automatically liquidated through a financial intermediary.
Principle of leverage
Leverage can be very risky, but it is popular with investors. In fact, thanks to a leverage of 10, it is possible to invest €1,000 in cryptocurrencies with a starting bet of only €100. Enough to improve performance… But be careful, because if the market fluctuates in the opposite direction of the expected scenario, you can lose your entire bet or need to replenish your account immediately to keep the position open.
Derivatives that allow you to short a cryptocurrency
Derivatives represent a large family that can take different forms: contract for difference (CFDs), futures contracts (future), forward contracts, Turbos or options… Everyone has their own specifics.
Their common point? They are called ” derivatives in the sense that they derive from the value of the asset. They are designed as insurance contracts which helps protect against a risk, such as falling prices. These products create a time lag between the moment the contract is signed and the moment it is completed, which makes it possible to do two things that are impossible with a spot contract: short selling (the short) and leverage . .
Conclusion
Derivatives, such as futures and CFDs, are the best way to sell short and use leverage. But they are also very dangerous! They should be handled with the utmost care.on pain of losing his entire bet in less time than it takes to tell.
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Passionate about trading, I have been analyzing and commenting on financial market news as an economic reporter for more than 10 years. Crypto-enthusiast since 2019, I follow this universe with great interest, its effects go beyond the financial world.
Florentine Loiseau
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