The cryptocurrency market tends to be volatile, and people instinctively prefer to enter a bull market rather than a bear market. However, investors should be aware that you can also benefit from a bear market. Follow the article below to learn more about short selling.
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Short selling is also known as short sale or short. This is a trading strategy based on the expectation of a decline in the market price.
Normally, investors will buy the bottom and sell the top to take profits. But with short selling it is the opposite, you sell at a high price first, then wait for the price to fall, buy back and profit from the price difference.
For example: a trader predicts the price of BTC will fall, instead of taking a long position, that trader will take a short position.
When entering the order, BTC price is $20,000. After that, the price of BTC dropped to $19,000. Thus, the trader made $1000 profit from the BTC price difference before and after entering the order.
One of the most frequently asked questions when learning about short selling is how to short an asset when we don't own it?
The answer is based on the BORROW and PAYMENT mechanism.
First, you will borrow some assets that you don't own (from the exchange) and sell them at market price. Then buy back the property at a lower price and pay back the borrowed property. The profit you make is the difference between the original selling price and the repurchase price.
Short Selling Process
The formula for calculating profit from short selling is relatively simple. The lower the purchase price of the property compared to the previous sale price, the more profit you will make. In other words, the lower the redemption price of the shorted asset, the higher the profit you will make.
Profit formula:
Profit = (Sell price - Buyback price) x Quantity of assets - Transaction fee
Here is what each component of the formula means:
- Selling price: The price you sell to the market.
- Buyback price: The price at which you bought back that they sold short to the market.
- Amount of assets: The amount that you have sold.
- Trading Fees: Trading fees for the exchange.
Profit formula example
Investors have the opportunity to profit from the cryptocurrency market that is going up and also the markets that are going down when short selling.
Without too much initial capital, short selling can bring large profits.
The purposes of short selling include speculating for profit, hedging the portfolio risk, and taking a short position.
However, Short Selling also has certain risks, particularly when investors borrow money to make short trades. Accordingly, they not only risk losing their initial capital, but also owe more borrowed money (assuming that investor borrows in one place and short sells somewhere else).
Therefore, the people who take and profit from this strategy are usually investors and traders who have a lot of experience in the market, have strong psychology and have built a suitable trading system. If you are a first-time investor, you should probably think twice before choosing a shorting strategy. At least, study and learn carefully the knowledge, learn from the experiences of those who went before to get the best results.
While some consider positions against a market uptrend to be bad, most economists and financial experts agree that short sellers providing liquidity to the market, making the market more efficient. Thereby increasing the market's attractiveness to large and small investors.
