Bitcoin: Difference between short and long trading
The Bitcoin market can be quite stressful to invest in, as cryptocurrencies are highly volatile. It isn’t surprising for crypto-traders to see Bitcoin’s price jump - or drop - 15% in a single day. But this volatility is also what attracts so many investors, who are looking to take advantage of these quick changes in price to make quick profits.
That’s why an increasing number of brokers offer the opportunity to take advantage of bullish (long trading) as well as bearish (short trading) price movements to give crypto-traders a chance to take advantage of Bitcoin, regardless of the market direction.
It is possible to take advantage of both rising and falling markets when trading derivatives, such as financial CFDs (Contracts For Difference), which rely on margin trading and leverage.
With CFD trading, you do not own the underlying asset you’re trading - such as Bitcoin - but rather it’s a contract you have with your CFD provider to exchange the difference in the value of the underlying asset between the moment you open and close the trading position. CFDs are only financial contracts, that’s why you do not own the assets you’re investing in and you can speculate on its price direction.
Long trading vs. Short trading: How is it Different?
Long trading occurs when you’re buying an asset in the hope that its price will rise in the future. In that case, you will open what’s called a “long” position, meaning that you will buy an asset at a low price and sell it at a higher price to make a profit.
Short trading, on the other hand, happens when you’re short selling an asset in the hope that its price will fall in the future. In that case, you will open what’s called a short position, meaning that you will sell an asset at a high price (that you would have previously borrowed from your broker) and buy it back later at a lower price. Then, you will give the asset back to your broker, keeping the difference between the sale price and the buy price.
Why you should use both long and short trading in your Bitcoin trading strategy?
Generally, you open a long position to profit from rising Bitcoin’s price, but the cryptocurrency market - or any other market for that matter - goes through bullish and bearish phases.
That’s why having a way to monetize both market movements will allow you to take advantage of many more trading opportunities.
Short trading can also be used to hedge your existing Bitcoin-portfolio with long-only BTC exposure, therefore reducing your portfolio’s overall volatility and risk.
Moreover, using investment products like CFDs to trade Bitcoin means that you won’t own the actual coins, so you won’t have to deal with transferring and storing your Bitcoins in a secure cryptocurrency wallet.
The most lucrative and exciting trading times are during high volatile phases. But because of the inherent volatility of Bitcoin, it’s important for you as a crypto-trader to use all tools available to better manage price drops, and even take advantage of them, by knowing how to short Bitcoin over the short run, through leveraged products like CFDs.