Cryptocurrency

Understanding Marginal Trading/Shorting

What is shorting? — Short selling cryptocurrency is the belief that bitcoins price will decline, enabling it to be bought back at a lower price to make a profit. This allows you to profit when the market is down, and allows you to put your prediction speculation to the test. There are different ways that you can effectively short and let me stress it from the beginning, it should be for professionals only. You can short in the bitcoin futures market which has been prevalent recently, you can short it on a few trusted bitcoin exchanges, and you can short bitcoin Contract for Difference (CFD’s).

Bitcoin futures — Starting on December 10, 2017 you are now allowed to trade bitcoin futures and you can do so on some trusted exchanges. Futures sounds exactly like it is, you are betting on the future price of the coin which in this case is Bitcoin. Each futures contract is for 5 bitcoin, and the minimum contract size in a trade is 5 contracts. At a $10,000 BTC price, that means you won’t be making any trades for less than $250,000.

Buying a future Example:

Let’s say bitcoin is $500 and you think it will be $700 in a month. You can commit to buying bitcoin at a agreeable $600. So if you are correct at the end of the month, you will get the $700 BTC ( or more ) for $600. If you are wrong and bitcoin declines, you will be paying more for a bitcoin and thus you would not be profitable.

Selling a future Example:

Let’s say bitcoin is $500 again and you think it will decline to $300. You can make an agreeable point of $600. If you are correct and bitcoin decreases then you would have sold it at $600 and profited. Otherwise if you are wrong and bitcoin increases, you would be losing money as you have to sell it at the agreed amount.

So you are betting on the price and speculating what the price could reach, using your evaluation skills and possibly noticing a upcoming fork or roadmap update. Futures can cause a lot of money switching hands, but it doesn’t mean that bitcoins are switching hands as fast. Lots of future contracts are settled via USD and so no bitcoins are actually sent.

What does this mean for bitcoin? — On the one more companies that are buying futures will want to own bitcoins so that they can hedge. Some companies will find it more profitable to hold bitcoins so they can even out their potential losses. However at the same time, buying a futures contract does not force you to actually own the bitcoin if you agree to settle via cash. So even if companies are pouring millions of dollars, they are not necessarily buying bitcoin directly. Companies that might have been interested in buying bitcoins will now have the option to simply buy bitcoin futures and hold them long and so money might not be used actually buying bitcoin. On the contrary companies that have already bought bitcoins might find it more beneficial for them to enter the futures market and sell the bitcoins. People are also looking at bitcoin investment funds so that they don’t need to trust any bitcoin exchange, or hold the bitcoin themselves. An example of this is

GBTC: GBTC which is trading at a fraction of bitcoin. This is something that a bitcoin investor or even an altcoin investor can’t shrug of their shoulder, however the futures market has a good opportunity to really bring in a lot of money for bitcoin and increase its already rapid growth. It is also good to note that these market strategies are nothing brand new and have been around for ages, you can buy futures in gold and many other markets.

Margin Trading — Margin trading allows a trader to open a position with leverage. If you open a margin with 2x leverage you would increase your assets by 10% and yield a position of 20% since you are leveraging 2x. Trades are conducted 1:1. ( Standard trades ) When margin trading you are borrowing coins from others in order to invest more. The people or company lending the coins earn more money via interest. In Poloniex the users are the ones that have the option to lend the coins, however on other exchanges it is the actual company to lends the coins out. Just like with futures you are able to margin trade long and short. With shorting you also don’t need to actually own the coins and can trade using USD.

Margin Trading risks — 1.When you margin trade on a exchange, your coins are not held in a cold storage so they are more likely to be stolen from a hack. 2. As with the other options, you can make a lot of money but at the same time you are able to lose a lot of money quick. Which is why margin trading and shorting should be attempted by professionals who know all aspects of it. Now you might think, are the people loaning the coins risking? When you margin trade only your investment can be lost, which is called liquidation value. The exchange that you are using will automatically close your position when you run out of liquidation value. Hence the loaned coins are not lost when the market goes the opposite way.

Example : Let’s say that Bitcoin’s value is $10,000, we bought one Bitcoin (long) with leverage of 2:1. The cost of our position is $10,000 USD, in addition we borrowed $10,000 USD. The liquidation value will be a little over $5000 USD — at which level we lose exactly our initial $5000 USD not including fees and interests.

Exchanges that allow margin trading : Bitfinex — This exchange has the largest trading volume of Bitcoin USD market along with many other coins, and allows its users to margin trade up to a leverage of 3.3X. The exchange itself is fairly easy to use so it is preferred by many.

Poloniex — Allows its users to leverage trade with 11 different altcoins, there is no BTC USD margin trading however. They allow margin trades up to 2.5X leverage. It can also get fairly expensive to trade on this exchange however.

You can also check out GDAX and Kraken

Contract for Difference — This is one of the most popular ways to short bitcoin and it is conducted through a contract between the client and broker. The client and the broker decide to pay out the percentage differences in price. So for example if you think bitcoin will increase and you bet that it will, and it goes up 5% during your contracted time you would earn 5% in cash. While on the contrary if it goes down 5% you will pay the firm or client 5% in cash. This allows you to place predictions and “skin in the game” without having to buy a coin. Unlike the cash settling that can occur in futures, contract of difference allows you to place bets on the percentage change and not the actual price of bitcoin itself.

Avatrade allows you to open up a demo account which might be beneficial for some people.

Plus500 is a trading company providing online trading services to retail customers. The company was founded in 2008 and provides trading in CFDs on a range of financial services.

*Remember that doing any kinds of these trades are very risky and should only be done by advanced traders.

Options — Purchase of an option grant the ability, but not the obligation, to trade at a specific price by a certain expiry date. When buying a option you are paying a premium to be given the ability to buy/sell a agreed amount of bitcoins on a certain date.

What could potentially change the market?

Any contentious hard fork is usually bad for the coin, however the market acts fairly irrational so this is not a guarantee. Hacks, discovered exploits, transactions unconfirmed, bans, high profile individuals moving money out of a coin etc.

Should you short?

I personally don’t think anyone should be shorting and predicting a market to decrease because the crypto space is very irrational. As long as coins like Bitconnect exist, it proves that anything can be sold and make it to the top 20. Tons of ICO’s and other coins are getting millions in funding without a Minimal viable product ( MVP ) so the market can act irrationally from a traditional standpoint. Often times people think if a coin is at the all time high ( ATH) and “over-evaluated” it is a good idea to short but I beg to differ. People have shown in the crypto market to support “bad” coins ( from a traditional standpoint ) and so there is no reason that the coin should decrease and in fact often times will continue an upward trend. Even if you are successful and are making money it still doesn’t make a whole lot of sense especially when you factor in risk management. If you do choose to short, be safe and make sure you understand fully everything because it is a dangerous game.

Twitter: @cryptoassetnews




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