All Cryptocurrency articles are written by our contributor, CryptoNexis
One challenge as you begin trading cryptocurrency is learning the new lingo. Today, we’ll breifly cover what it means to “go long” vs. “go short.”
“Long” means buy or bought in traditional trading. In Cryptocurrency, if someone says “I’m long on BTC” it means that person owns X-amount of BTC. If someone says “I’m going long BTC at $15K” it means they intend to buy BTC at $15K.
When would you go long?
You’d “go long” or buy when you believe a coin will rise in value. This is your basic buy-low-sell-high strategy.
When you are long (own crypto) and you exit your position by selling, you are “flat.” Flat means you have no position—you are neither long or short.
When people say they are “going short” or “shorting,” specifically in a cryptocurrency setting, they generally mean intending to sell in anticipation of a price drop. In traditional trading, however, going short means selling a stock without first owning it. Opportunities to short sell are beginning to emerge with cryptocurrency DeFi projects, but are less common, mainly due to the volatility of crypto.
But how do you sell something you don’t own?
Short selling is a form of margin trading—allowing you trade with more assets than you own. The short investor will borrow the shares from a brokerage firm in a margin account. For example, you would borrow and sell X-amount of ETH for $60,000 (at a trading price of $600), anticipating that the price of ETH will fall. Let’s say ETH falls to a trading price of $500, you then buy back the same amount of ETH—but now costing you $50,000. You end up with a profit of $10K upon settling your account, i.e., paying back the dealer who loaned you the money (minus loan interests and any fee agreements).
The obvious risk with short selling is that the price does not fall but continues to rise, and you are then forced to buy back ETH at a higher price upon the settlement date/time. There are no set rules for how long a short sell can last; it is typically an agreement between the lender and borrower. Any margin trading, where you are borrowing assets, can be extra risky bacause you can end up being on the hook for much more than you bragained for if your prediction of the market is completely off.
Also, a short seller is often subject to a “margin call” if the price of an asset rises rather than falls. In order to borrow from a lender and sell the initial assets, a trader will place a certain amount of money in the margin account as collateral.
A margin call is triggered when a trader’s account value falls below the lender’s required minimum (usually a percentage difference between the borrowed amount and the current trading price value). The margin call requires the investor to deposit more money to bring the account back to the minimum maintenance margin.
If you’d like to try short selling cryptocurrency, some of the major exchanges have options.
Keep Reading Our Cryptocurrency Series:
- 10 Crypto Traders to Follow on Twitter this Year
- How to Trade Cryptocurrency 101: The Relative Strength Index
- How to Trade Cryptocurrency 101: Understanding Moving Averages
- How to Start Trading Cryptocurrency This Year
- Top 10 Traders Share Their Best Advice (Traditional Trading)
- 7 Cryptocurrency Trading Strategies to Learn