A Beginner’s Guide to Long and Short Positions in Crypto

Long and short positions are two main strategies that traders use to speculate on crypto price movements. These are opposite strategies with different advantages and downsides.

Opening a short position means taking advantage of short-term trends to profit from these price movements. For these traders, every small price movement counts. So, they take bigger risks.

In contrast, going long means investing in cryptocurrency for the long term. The expectation is that its value will rise over time. Long position traders do not worry about small price movements as long as they make a profit in the end. These investors usually take a smaller risk.

Anyone can employ these position trading strategies in any market condition to make a profit. Let me explain.

What is position trading?

In cryptocurrency, when a trader buys an asset, they open a position. Similarly, when they sell the asset they bought, the position is closed. That position can be opened and closed quickly (short position) or kept open longer (long position).

The difference between long and short positions

You start a long position when you purchase a crypto asset in the hope that its price will rise. In contrast, a short position is started by disposing of an asset (typically one that was borrowed) in the hope that its price will fall.

When you exit a short position , it means you bought the crypto assets at a lower price hence you will have made gains. Exiting a long position involves selling the asset at a higher price to lock in profits.

Example of short position trading

To apply a short-selling strategy, you need to borrow a crypto asset that seems to lose its value. You can then sell it on the market.

Assume Solana (SOL) is currently trading at$ 97.66 per (SOL / USD). Borrow 100 SOL tokens at first. Sell those tokens for around $9766. But, the price falls to$ 93.45 per (SOL / USD) after 10 hours. So, you can buy 100 SOL tokens and replace the borrowed ones. Your net profit will be$421.

What are the pros and cons of short selling crypto?

Pros

• Allows you to profit from a cryptocurrency’s price drop
• Short selling can serve as a hedging strategy to manage risk in a trader's portfolio
• Use short positions to diversify your portfolio and minimize risks

Cons

• You may lose your investment and get indebted to the broker/exchange
• In some cases, short-sellers encounter liquidity issues

What is a long term position trader?

Investors who open a long position are looking to take advantage of a rising price movement. Most position traders keep their positions open for at least a few weeks, months or even years. Going long is also considered buy-and-hold trading strategy.

The main advantages of taking long positions include:

• It is considered less risky than day trading or swing trading
• You do not have to spend a lot of time every day monitoring your trades
• You can receive dividends (or new tokens) for the assets you hold if you stake them in a staking pool

However, going long has the following downsides:

• If you do not choose the right asset to invest in, you can lose money over the long term
• It requires a bigger initial investment because it might not be profitable with a small capital
• You cannot take advantage of profitable opportunities that pop up because a part of your money is locked in a single trade

How to short cryptocurrency in 2024

Shorting cryptocurrency involves selling a digital asset with the expectation that its price will decrease. Here’s how to go about it.

1. Research and analysis

Start by thoroughly researching and analyzing the cryptocurrency you want to sell. Check for signs that an asset’s value may be declining, such as unfavorable news, overvaluation or its technical indicators.

2. Select a trading platform

Pick a trustworthy cryptocurrency exchange or trading platform that provides margin trading or short-selling alternatives for that particular cryptocurrency you want to short.

3. Margin account setup

Opens a margin trading account on the chosen platform. Complete any necessary identification verification steps. Next, deposits fiat money or cryptocurrencies to use as collateral. This collateral is essential to protect against potential losses when opening a short position.

4. Borrow cryptocurrency

To sell a crypto asset short, you must borrow it from an exchange. This borrowed cryptocurrency is then sold on the open market.

5. Monitor and set limits

Carefully monitor the crypto market to watch price changes. Use a reliable crypto trading bot to establish a target buy-back price. Also, set up stop-loss orders to prevent further losses. The bot will alert you to buy back the borrowed cryptocurrency to close off your short position at this target price.

5. Close the position

When the desired price decline occurs, close your position by purchasing the borrowed cryptocurrency at a lower price to return it to the lender and profit from the price decline. Exit your short position and enjoy the profits.

Should I go long or short on cryptocurrency?

Shorting a cryptocurrency might be a wise move for investors who think the cryptocurrency market will crash at some point in the future. But it is best to short crypto assets with a reputation for having high liquidity or a steady high trading volume throughout the year.

As for going long, open long positions to take advantage of a rising price movement and keep it open for a longer period.

For example, you could open a position on Bitcoin ETFs because they tend to constantly follow an upward trend, and you might not make big profits if you keep them open for a shorter period.

That said, the following factors should help you decide whether to go long or short on crypto.

1. Market analysis: Analyze the current market trends, including historical price movements, trading volume, and market sentiment.
2. Fundamental analysis: Evaluate the fundamentals of the cryptocurrencies you're considering, such as technology, adoption, use cases, and the development team behind the project.
3. Technical analysis: Study technical indicators and charts to identify potential entry and exit points. Look for patterns and trends that may indicate whether the price is likely to increase or decrease.
4. Risk tolerance: Consider your risk tolerance and investment goals. Going long on cryptocurrency may offer the potential for higher returns over the long term but also involves holding through market volatility. Shorting cryptocurrency can be profitable if you correctly predict price decreases, but it carries higher risk and may lead to significant losses if the market moves against you.
5. Diversification: Diversifying your investment portfolio can help mitigate risks.

Remember, you can use a crypto trading bot for position trading. Our advanced automated trading bots are equipped with features tailored for shorting and long position strategy.

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