2023.04.06 2023.04.06
Bitcoin (BTC) Longs vs ShortsMichael Hypovhttps://www.litefinance.org/blog/authors/mikhail-hypov/
Every time a trader wants to enter the derivatives market or trade cryptocurrency pairs, there is a choice between bitcoin shorts or longs. Given the high volatility of cryptocurrencies, the appearance of a sustained bull market is not a sufficient reason to go long Bitcoin. The future contract holder must take into account many factors to minimize risks and determine whether to open a long or short position on BTC.
This article will explain how to short Bitcoin and how to go long this crypto to trade profitably. You will find out what long and short trades on Bitcoin are and how they differ from each other. You will also learn the essential factors that should be considered in the short-term and long-term outlook for digital assets to avoid a loss on the spot market.
The article covers the following subjects:
What Does Bitcoin Shorting Mean
How can I short Bitcoin? First, let me explain what Bitcoin shorting means. Shorting in crypto trading is usually called the sale of an asset, for example, BTC, with the aim of buying it at a lower price later. That is, a trader who shorts bitcoins assumes that the price of an asset in the spot market will fall and opens a corresponding position in advance. If the price has fallen, a trader can buy bitcoins at a low price and sell them again at a higher price. In this case, the sold asset will bring a profit due to the price difference.
Shorting is a risky way of trading. It should not be practiced without sufficient knowledge of crypto trading. Let us look at the rules to go short in the market:
Find the necessary asset on the derivatives exchange;
Expect a signal for the price drop and sell the coin;
Buy back the coins when the Bitcoin price starts to level off after the drop, and there is a potential for growth.
In the case of a derivatives contract, such as options, the principle of entering bitcoin longs and shorts will be different. A derivatives contract indicates the price at which you can buy or sell a crypto derivative after the contract expiration. If, on the expiry date, the dollar-cost value of the crypto asset falls below the “Put” strike price, the “Put” value will increase, and the trader will make a profit.
To understand how to short BTC, beginners should avoid derivative contracts at first, as their execution mechanism may seem confusing and increase the risk of losing money rapidly.
How Do You Short Bitcoin
If you have a question like “How do I short Bitcoin?” let me explain. Entering a Bitcoin short makes sense if you have reason to believe that the price will fall. To get sell signals, you need to analyze the market and monitor the readings of technical indicators, economic situation, and industry insight on Bitcoin that can affect the price.
The best way of minimizing risk when shorting Bitcoin is to set achievable trading targets and a reasonable stop loss. It will close the trade automatically if the price moves in the opposite direction to the forecast. Beginning crypto traders should set stop losses as close as possible to the trade entry point so that the potential loss will be no more than 1% of the deposit.
Shorting BTC Example
It is easier to study entering bearish positions on real trading examples. Let us look at an example of entering shorting the BTC, setting targets, and taking profits.
You need clear market signals to decide whether to go short or long to make money on the BTC. It could be a breakout of the support or resistance level. In this case, the price breaks out the trendline (blue circle in the chart below). We could expect that the price should continue declining in the future. Therefore, one could enter a short when the next candlestick opens (blue line).
Bitcoin is a very volatile asset, and its chart is moving up and down like a roller-coaster. I set a stop loss at the next local high (red circle) to limit the potential loss if the price goes in an unwanted direction.
To define the target, we determine the next low on the history chart (green circle), the support zone. When the price reaches the support level, the trade is exited with a profit (green line).
What Does Bitcoin Longing Mean
Longing or opening long positions in the presence of an exchange wallet involves buying bitcoin at a low price to resell it when the BTC value rises. This type of trading is available on any centralized and decentralized exchange using any crypto wallet. The exception is a hardware wallet, usually used to store coins securely and, therefore, inconvenient for trading transactions.
In trading a crypto derivative, longing generally means buying a contract to deliver a crypto asset in 1 day. Before expiration, the contract is automatically opened the next day again. Thus, it actually becomes indefinite. In trading, this instrument is called a perpetual swap or perpetual futures contract.
Let us look at the steps for longing Bitcoin.
Analyze the market and expect a signal of a soon price rise;
When the price starts growing, enter a long trade;
Sell the underlying asset when its value increases;
The trade profit is the difference between the entry and exit prices.
How to Long Bitcoin
Trading through a broker almost always involves the use of leverage, which increases both potential profit and potential loss. On the other hand, Bitcoin is distinguished by high volatility, and its price often changes its direction at a frequent interval. Therefore, longs should be treated with the same caution as shorts.
Open a long position only if there is a reliable signal for price growth and long-term appreciation. It is better if additional confirming signals are used in the trading strategy along with the main signals. In this way, you can reduce the total number of long trades while at the same time increasing the accuracy of the forecast.
Longing BTC Example
Let’s look at entering BTC long on a real example.
The signal to go long in the bull-market when the price exceeds the local highs (purple line).
Enter a trade (blue line) when the next candlestick opens following the breakout (blue line). A stop loss (red line) is set slightly lower than the entry point, around the low preceding the entry.
The take profit is set at the next local high (green line). Exit the trade when the price reaches this level. If the price breaks through the high, like in this case, enter a new long according to the same strategy.
How To Long Bitcoin With Minimum Risk
Digital currencies based on blockchain technology are highly volatile. This gives more opportunities to make money, but at the same time, increases the risks. Even traders using advanced technical analysis methods are faced with the fact that the chart suddenly changes direction under the influence of some kind of news or event within the system. Therefore, one needs to minimize the risks during the trading process.
1. Position trading
It is a simple method suitable for beginner traders. This style of trading involves buying a crypto-asset to open a long-term position. This will protect your trades from intraday volatility and market noise. The main requirement for position trading is to maintain a risk-to-reward ratio. Ideally, it should not exceed 1 to 3.
2. Adding up to positions
Adding up means buying small amount of BTC when there are signals for an upward movement in the chart and gradually adding up to the long position as the price rises. For example, you can increase the position volume when the chart enters the breakeven zone, and add up more, when key levels are broken, or local highs are broken through. Thus, if the growth signals are misinterpreted, the trader will reduce potential losses.
3. Averaging
You the BTC in small shares of the deposit when the price declines. This approach can be used on a short-term correction when you are confident that the Bitcoin price will be growing in the long term.
4. Hedging
You enter short trades that hedge against the losses on Bitcoin longs. For example, you buy the BTCUSD on the spot market and simultaneously enter a short on the futures market. The short trade hedges against the price drop for the long trade. At the same time, the loss on the short position will actually be an insurance premium and will reduce the profit yielded by the long trade in case the price goes up.
There is another feature for hedging BTC shorts vs longs. Instead of shorting Bitcoin, you can repurchase any asset negatively correlated to the BTCUSD. It is quite difficult in the crypto market as almost any currency on the blockchain asset-class goes in the same direction as Bitcoin.
Bitcoin Longs vs Shorts
Let us compare the BTC longs vs shorts. Trading is always associated with risks, doesn’t matter whether you go long or short. However, these risks are different.
The profit for a long trade is not limited as the price can rise to any level. In real trading, the price growth is limited by buyers’ willingness to buy the coin at a high price. Even large traders have limited abilities. Still, there are no strict limits.
As for bitcoin shorts, the potential price drop is capped at zero. That is why the position is called “short”, it is always limited in time. Such positions should only be opened in case of a pronounced bearish trend. A short position is almost always linked to leverage, so it carries a special risk for beginners. I recommend beginners first practice on a demo account or micro-deposits.
The features of Bitcoin shorts vs longs do not matter much for professional traders. After all, it is not so important what position is open; it is important whether it follows the general market trend. Therefore, before you enter a trade, it is essential to determine the overall trend. Don’t forget the main rule of trading, “Trend is your friend!”
BTC Long/Short Ratio
The Bitcoin long/short ratio shows the number of margined BTC in the market. The Bitcoin long/short ratio is used to predict short-term movements in the BTCUSD pair. When working with this tool, it is important to consider its features:
The ratio reflects the amount of the asset opened in the margin, not the number of positions.
The indicator takes into account only margin positions;
The tool is appropriate only for short-term trading.
It is believed that the indicator reflects market sentiment. As a rule, a high proportion of long positions in relation to short positions means that the market is overbought, and a descending correction is coming.
You should be careful when using the Bitcoin long/short ratio tool in trading as there are some limitations:
As only positions for derivatives are taken into account, their number is easy to manipulate.
The indicator doesn’t show the sentiment of the numerous spot market participants, options market, and other trading platforms.
Since the margin market doesn’t imply long money, the indicator can’t be used to define medium-term and long-term trends.
Conclusion
The choice between long and short positions is usually based on market trend forecasts. The direction in which the price will go after entering the trade determines whether the transaction will be profitable or unprofitable. Therefore, when choosing between short and long, it is necessary to pay special attention to the market analysis and forecasts for trends.
Also, you must strictly adhere to the money management rules when trading on margin. Bitcoin is a high-risk asset, trading it with leverage increases this risk many times over.
Master your skills and gain experience on the LiteFinance demo account, which is available for free without registration.
Bitcoin Long And Short Trading FAQs
The content of this article reflects the author’s opinion and does not necessarily reflect the official position of LiteFinance. The material published on this page is provided for informational purposes only and should not be considered as the provision of investment advice for the purposes of Directive 2004/39/EC.
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